MNI POLICY: RBA Still Dovish On Rates, Sees Risks Ahead

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia stands ready to "ease monetary

policy further if needed" to support sustainable growth in the economy,

according to the Minutes of the September 3 policy meeting.

     The RBA decided to leave the cash rate unchanged at a record low 1.0% on

Sept 3, but the minutes, published Tuesday, show there has been no change to its

dovish outlook, even as it waits for a positive impact from two earlier rate

cuts on domestic investment and consumption.

     The RBA is now watching developments in the domestic and international

economies to assess its next move, noting heightened downside risk in global

market conditions, weaker external and domestic demand, and lower interest rate

policies from other central banks.

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

would be required in Australia to make sustained progress towards full

employment and achieve more assured progress towards the inflation target," the

Minutes said.

     --MARKET PRICING

     The Minutes note that financial market pricing implies another cut of 25

basis points in official rates by November, "with a further cut expected in the

early part of 2020."

     The RBA cut rates by 25 basis points in June and also in July in response

to faltering economic growth, low inflation and weak consumption.

     Unemployment has been stable at 5.2% but record levels of participation and

low wages growth indicate there is still spare capacity in the labour market.

Although employment was growing there were few indications that wage pressures

were building.

     "A further gradual lift in wages growth would be a welcome development,"

the Minutes said.

     On the positive side, the RBA notes that Australian businesses had not yet

been impacted by the declining world trade environment to the same extent as

other advanced economies, largely because Australian exports were more exposed

to domestic Chinese demand rather than integrated in global supply chains.

     --AUSSIE DOLLAR

     The floating exchange rate for the aussie dollar was it its lowest level in

recent times, and was acting as a "shock absorber" for the Australian economy.

     The RBA also noted the turnaround in the housing market, with house prices

rebounding in the key markets of Melbourne and Sydney, but turnover remained low

and spending on furnishings and household items were not expected to contribute

to consumption in the shorter term.

     Any improvements in consumption, wages growth, GDP and inflation were

likely to be gradual, with the RBA expecting second quarter GDP growth of 0.5%,

after 0.2% in the first quarter.

     Inflation, currently at 1.6%, was expected to be "a little above 2%" over

2021 as output growth picked up and the labour market tightened.

     The September Minutes did not mention any continuation in the discussion on

"unconventional monetary policy" measures which featured at the August meeting.

     At that meeting, the RBA Board reviewed the implementation of such measures

in advanced economies over the last decade, from negative interest rates through

to foreign exchange intervention and the purchasing of private sector assets.

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

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