MNI POLICY: RBA Maintains Guidance, Focuses On Conditionality

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's current judgement is to

maintain the cash rate at its current level, Governor Philip Lowe said in a

speech Wednesday. 

     Lowe was speaking at the Anika Foundation luncheon in Sydney on the topic,

"Demographic Change and Recent Monetary Policy."

     Following are the key observations we made from the speech:

     --Governor Lowe maintained the guidance that the next move in interest rate

is expected to be up, not down but provided more clarity on the conditionality

of the guidance. In particular, Lowe's statement that "For the time being, the

Reserve Bank Board's judgement remains that the best course is to maintain the

cash rate its current level," could be seen as a tad dovish, though some might

describe it as hawkish.

     --Lowe said the RBA sees "reasonable prospects" that the economy will

record good growth, the unemployment rate will come down gradually and that

inflation will increase over time. The word "reasonable" could be seen as an

operative word, and indicates the RBA is not very confident about its outlook.

If that is the case, then the confidence around the next move up guidance should

also diminish. Indeed Lowe said, "If this how things evolve" the next move in

interest rate would be up. As the economy strengthens and income growth and

inflation lift, it would be natural for interest rates to return towards more

normal levels, he said.

     --Lowe said the timing of any future change depends on the speed of the

progress towards the unemployment and inflation goals. If the progress is faster

than expected, rate rise would happen earlier than expected, and any slower

progress would see a longer period without an adjustment, he said.

     --The RBA appears to be dismissing the impact of weakness in the housing

market. Lowe said that notwithstanding the changes in the housing market, the

RBA still expects consumption growth of around 3% over each of the next couple

of years.

     --The RBA also remain positive on the outlook for the labor market. Lowe

emphasized that the jobless rate could reach 5% at some points over the next few

years. He reminded that 5% is the conventional estimate of full employment in

Australia though it is possible it would go lower than this on a sustained

basis. "Time will tell," he said.

     --The RBA is also confident about the outlook for wage growth. The

"tightening of the labour market is evident in the steady increase in job

vacancies, with the number of vacancies, as a share of the labour force, at the

highest level in many years. It is also evident in the increase in the number of

firms reporting that it is difficult to find workers with the necessary skills.

As expected, the tighter labour market is leading to higher wage outcomes in

certain pockets of the labour market. Over time, we expect that this will become

a more general story, although this is going to take some time," Lowe said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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