MNI POLICY: RBA Prepared To Ease, But Room Running Out: SoMP

--RBA Aware Near Time Other Easing Options May Need To Be Considered

--RBA Sees Economy At Gentle Turning Point, No Swift Bounce

By Lachlan Colquhoun

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

interest rates again to stimulate the economy, but is aware that it is running

out of room before "other policy options" must be considered.

     The quarterly Statement on Monetary Policy, released today, reveals that

the RBA believes that the Australian economy has reached a gentle turning point,

but any recovery will be gradual and uneven.

     Given this outlook, the RBA says it is "prepared to ease monetary policy

further" if needed to support sustainable growth, with a focus on full

employment and the medium term inflation target.

     The Statement acknowledges that financial markets have "priced in some

chance" of a further 25 basis point cut in official rates next year.

     The RBA cut rates in three increments of 25 basis points this year, in

June, July and October, trimming rates to a record low 0.75%.

     While confident that the cuts have had a positive impact on the economy,

notably on turning around a decline in asset prices in the housing market, the

RBA's outlook is still dovish.

     --OTHER OPTIONS

     There was "not a case," the Statement said, for the bank to hold stimulus

in reserve to address future potential shocks. "Experience has shown that the

level, not the change, in interest rates is the key driver of demand," the

Statement said.

     However, the Bank was "mindful" that rates are already very low.

     "Each further cut brings closer the point at which some other policy

options might come into play," the Statement said.

     "Further easing could unintentionally convey an overly negative view of the

economic outlook, or that the usual channels of policy transmission might be

less effective at low interest rates."

     --WEAKER AUSSIE

     The Statement notes that the weaker Australian dollar, which is trading at

ten year lows on a trade weighted index basis and against the U.S. dollar, had

strongly supported the export performance in the service and manufacturing

sectors.

     Manufactured exports, the Statement said, were up 12% over the year to the

June quarter 2019.

     Australian exports of iron ore to China had also benefitted from the

U.S.-China trade tensions, with Chinese authorities introducing stimulus

policies "tilted towards steel-intensive industries."

     "This has supported Chinese steel production and, in turn, demand for

Australian bulk commodities, even as Chinese growth more broadly has slowed,"

the Statement said.

     Overall, the RBA view is that the Australian economy is "gradually coming

out of a soft patch", with moderate growth expected over the remainder of the

year.

     The key to growth is the labour market, where despite increased employment

the overall unemployment rate is stuck at around 5.2% due to record high

participation rates. This was keeping wages growth sluggish, dampening inflation

and consumption.

     The RBA is forecasting GDP growth at 2.3% at the end of 2019, rising

gradually to 3.1% by December 2021. In the most recent data, from the second

quarter, GDP is at 1.4% - the lowest level since 2009.

     Unemployment, currently at 5.2%, is forecast to continue at that rate but

fall to 4.9% by December 2021.

     The RBA has recently repeated its focus on full employment, which is the

level at which wages begin to rise and fuel inflation, and while it has not

explicitly nominated a figure it is believed to be at around 4.5%.

     The forecast for inflation, now running at 1.7%, is a rise to 1.9% by the

end of this year and then to flatline through to December 2021. The RBA's target

range is between 2% and 3%.

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

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