MNI POLICY: RBA Still Dovish, Sees Extended Time Of Low Rates

By Lachlan Colquhoun

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

fresh record lows to help stimulate a domestic economy "navigating a period of

slow growth," according to its quarterly Statement on Monetary Policy released

Friday said.

     Citing overcapacity in the labour market, which is flowing through to

sluggish consumption growth and inflation, the RBA says it is "reasonable to

expect that an extended period of low rates will be needed" to achieve its

targets.

     The Bank has cut interest rates twice this year, in June and July, and the

official cash rate is now at 1%, a record low. In its statement today, the Bank

notes -- but makes no comment on -- financial markets have pricing in another 25

basis point cut by the end of 2019.

     "The Board will continue to monitor developments in the labour market

closely and is prepared to ease monetary policy if needed to support sustainable

growth in the economy and the achievement of the inflation target over time,"

the SoMP says.

     --GROWTH "TROUGHED"

     Australia's GDP growth fell to 1.7% over the last year but the RBA believes

it "troughed" around the middle of this year. The Bank's forecast is for 2.5%

growth over 2019 and 2.75% in 2020 before hitting 3.1% in late 2021.

     The RBA inflation target is between 2% and 3%, and the Consumer Price Index

is currently running at 1.6% after slumping to 1.3% in Q1. The latest RBA

forecast is for inflation to flatline until June 2020 when it will reach 1.8%,

before moving into the target range at 2.1% by December 2021.

     In terms of employment, the Bank notes that despite increasing levels of

participation and employment, the unemployment rate has moved higher in recent

months.

     The forecast is for unemployment to stay at its current level of 5.2% until

December 2020, before declining to 4.9% by December 2021. A target for full

employment, according to the SoMP, is uncertain and difficult to pinpoint but is

"perhaps" at 4.5%.

     Reserve Bank Governor Philip Lowe articulated more of the Bank's dovish

thinking today in his opening statement to the House of Representatives Standing

Committee on Economics in Canberra.

     Lowe said that the RBA was prepared to ease monetary policy for as long as

inflation was below the target band and unemployment was above what the Bank

estimated as full employment.

     --NOT JUST MONPOL

     Lowe said that there were other options to stimulate the economy in

addition to monetary policy, which was "not the country's only option."

     "Monetary policy certainly can help, and it is helping, but there are

certain downsides from relying too much on monetary policy," he said.

     Neither Lowe's statement nor the SoMP referred to other measures, such as

zero or negative interest rates or quantitative easing, available to the RBA,

with Lowe instead calling on the Government sector to use the low interest rate

environment to borrow for infrastructure development, and urging it to pursue

structural reforms.

     Low interest rates around the world, and the dovish stance of other central

banks, were impacting on Australia and Lowe referred to this in his statement,

saying it was difficult to escape the fact that if global rates were low "they

are going to be low here in Australia too."

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

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