MNI PREVIEW: RBA Set To Hold, Eyes September Policy Cliff

--RBA Sees Effective Transmission of Earlier Moves, But To Act If Needed

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia is expected to leave policy

unchanged Tuesday, with official rates held at a record low for a fourth

consecutive month, while continuing to target a 0.25% yield on the benchmark

3-year government bond.

     With little ammunition left in term of conventional monetary policy, the

RBA is aiming to keep its remaining powder dry until current government stimulus

packages roll off in September before mulling whether further action will be

required.

     The RBA has consistently ruled out negative interest rates, pointing to

further unconventional policy if the need arises.

     The RBA last cut rates by 50 basis points at an out of cycle meeting in

March, announcing the simultaneous bond buying program targeting the 3-year

yield.

     It also introduced a A$90 billion Term Funding Facility (TFF) designed to

facilitate low cost lending by commercial banks to smaller businesses.

     --POLICIES WORKING

     The Bank has been consistent in its messaging over recent months that its

policies, complementing the Federal Government's AUD259 billion fiscal stimulus

package, are effectively transmitting to the real economy.

     RBA Deputy Governor Guy Debelle said just last week that the Bank believes

"these policy actions are working as expected."

     "The target for the cash rate, the level of the actual cash rate and the

target for the three-year Government bond yield mean that these important

pricing benchmarks anchor a low risk-free yield curve in the Australian

financial system," Debelle said.

     "Together with the liquidity provided through market operations and the

TFF, this has lowered the cost of funding for the banking system. In turn, this

has been transmitted through to lower borrowing costs for households and

businesses."

     --JOBS GOAL

     RBA Governor Philip Lowe has said the employment market is the key to the

recovery, and that the economy appeared to be picking up better than initially

expected.

     The RBA estimates had been for hours worked in May to fall by 15%, and the

actual figure from the Australian Bureau of Statistics was a fall of 12.1%.

     The RBA has previously forecast that unemployment would reach 10% in the

second quarter, while GDP growth would contract by 10% over the first half of

the year, with hopes now both may fare better.

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

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