MNI: RBA Kent: Next Rate Move Likely Up But Not Anytime Soon

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is making gradual progress

towards its growth and inflation goals and therefore a rate hike is unlikely

anytime soon, Assistant Governor Christopher Kent said Wednesday.

     Kent made the comments at the Q&A following his speech at a debt capital

markets summit in Sydney on the topic, "Australian Fixed Income Securities in a

Low Rate World."

     Kent, mostly quoting Governor Philip Lowe's previous message, said the next

move in interest rates is likely up, rather than down because the RBA is making

progress towards its goals. But because the progress is expected to be "very

gradual", a rate hike is unlikely "anytime soon."

     Earlier in the speech, Kent talked about the possibility that "search for

yield" and some increase in yields in Australia would occur as spare capacity is

gradually eaten into and inflation rises. He noted that evidence of stronger

wages growth and a prospect of rising inflation might push the U.S. economy in

that direction. Australia could be further from that point, but Kent said his

expectation is that the same forces will come into play here eventually.

     Kent began his speech by noting interest rates on a range of fixed income

securities have risen over the course of recent months. Still, they remain at

historically low levels and spreads between non-government and government debt

have declined to their lowest levels since the global financial crisis, he said.

     According to Kent, the decline in spreads on offshore fixed income assets

is relevant for Australian markets because many of Australian corporations issue

overseas. This offshore issuance facilitates capital inflows, which are the

financial counterpart to Australia's current account deficit. The decline in

spreads offshore also matters because they are highly correlated with spreads in

the domestic market, he said.

     Kent said it is hard to say if there is excessive risk-taking in fixed

income markets. "It's not clear that the relatively low level of spreads in

fixed income markets represents irrational mispricing of risk or is, by itself,

a cause of concern," he said. 

     Still, it is possible that we could see a noticeable pick-up in financial

market volatility, a sharp re-pricing of assets and, as a result, a tightening

in financial conditions, including higher spreads for corporate issuers, he

warned.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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