MNI POLICY: RBA Prepared For Further Easing - Minutes

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia is prepared to cut interest

rates again to support the creation full employment and sees lower rates as a

way of limiting any "negative shock" to the economy, according to the minutes of

the October 1 meeting.

     While the Bank discussed the need for some monetary stimulus to be "kept in

reserve to address any future negative shocks", experience had shown that it was

the level of interest rates, rather than changes in rates, which were more

important to stimulus, the minutes noted.

     "Members concluded that the Board could reduce the likelihood of a negative

shock leading to outcomes that materially undershot the Bank's goals by

strengthening the starting point for the economy," the minutes said.

     At its October meeting the RBA lowered the official cash rate by 25 bps to

a record low 0.75%, the third cut over a five month period this year.

     In an indication there may be cuts to come, the RBA acknowledged that

forecasts for unemployment and inflation "over the next couple of years" were

likely to be short of the Bank's goals and that recent data had "been on the

soft side."

     "It is reasonable to expect that an extended period of low interest rates

would be required in order to reach full employment and achieve the inflation

target," the RBA said.

     --PREPARED TO EASE

     The Board "was prepared to ease monetary policy further if needed to

support sustainable growth in the economy, full employment and the achievement

of the inflation target over time."

     Unemployment, currently at 5.3%, has moved higher this year even though

employment continues to rise with participation rates at record highs. The

Minutes show the Bank believes one cause of this is sluggish wages growth.

     Inflation is at an annualised 1.6% against the RBA target range of between

2% and 3%.

     --NEGATIVE TRANSMISSION EFFECTS

     The October minutes also reveal that although the Bank is aware its policy

stimulus may be less effective than in the past, it believes the transmission to

lower lending rates for borrowers was still likely to support household

spending.

     There was a recognition that some transmission channels, such as a pick up

in borrowing or a positive impact on the home building sector, may not be

operating in the same way as in the past "and that the negative effect of low

interest rates on the income and confidence of savers may be more significant."

     Reserve Bank Governor Philip Lowe has frequently mentioned the impact of

lower rates on retirees, many of whom depend on interest rates from term

deposits to fund their lifestyles.

     The Minutes acknowledged economic headwinds from the global economy, in

particular the U.S.-China trade tensions, and that further monetary easing was

expected from other central banks.

     The Australian dollar was "at its lowest level in recent years" and this

was creating a buffer for the economy and maintaining the country's export

performance.

     The RBA's next policy meeting is on November 5.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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