MNI: RBA Lowe: If Economy Improves, Next Rate Move Likely Up

--Updated with comments from Q&A

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia continues to see the likely

next move in interest rates to be up rather than down, but that is contingent on

the economy improving as expected, Governor Philip Lowe said Tuesday.

     Lowe made the comments in a speech to the Australian Business Economists'

annual dinner in Sydney, where he appears to have once again taken the

glass-half-full approach. Comments on economic progress masked the key concern

that inflation could remain subdued for some time.

     Lowe's overall message appeared to indicate that the cash rate is likely to

remain on hold for longer.

     In the speech, Lowe talked about the progress made in the past year, with

the economy closer to full employment and inflation moving toward the central

bank's 2% to 3% target range, which means a "more familiar normal is still in

sight."

     Lowe didn't indicate whether the normal refers to the setting of interest

rates, but it is likely to be one of the many parameters of normal.

     But even with normal within sight, Lowe said a continuation of

accommodative monetary policy is appropriate because the economy remains short

of full employment and inflation is expected to remain below average for some

time.

     The next move in interest rates is more likely to be up if the economy

continues to improve as expected, Lowe said. At the same time, continued spare

capacity and the subdued outlook for inflation mean "there is not a strong case

for a near-term adjustment in monetary policy." 

     Lowe talked in length about the labor market, wages and inflation, and the

key question about the extent to which an improving labor market will translate

into a pickup in wage growth and inflation.

     In particular, he talked about the structural reasons for subdued wage

growth and inflation from increased competition, not just among workers but also

competition between businesses, that has resulted in them not bidding up wages

in the way they once did.

     "Given these various effects, it is plausible that, at least for a while,

the economy is less inflation-prone than it once was. Both workers and firms

feel more competition, and it is plausible that the wage- and price-setting

processes are adjusting in response," he said.

     Increased competition in the retail industry is another factor that has a

significant bearing on the outlook for inflation, he continued. The RBA is

grappling with how much further this process has to run and their sense is "the

impact of greater competition on consumer prices still has some way to go as

both retailers and wholesalers adjust their business models."

     "So this is likely to be a constraining factor on inflation for a while

yet," he said.

     Lowe talked about the rebalancing in the economy that has been taking place

and the fact that negative spillovers from the lower levels of mining investment

are fading. The outlook for non-mining business investment has brightened but

growth in consumer spending remains fairly soft, he said.

     The RBA expects consumer spending to gradually grow as household incomes

rise with employment and wage growth increases, he said.

     But consumption might be wound back sharply in a shock scenario because of

the high level of debt that households are carrying. "If this occurred, it could

turn an otherwise manageable shock into something more serious," Lowe warned.

     The recent improvements in the mortgage debt market in response to steps

from prudential regulators are all positive developments, but the RBA will

continue to watch them closely, he said, reminding that the RBA does not have a

target for housing prices but a return to more sustainable growth in housing

prices has reduced the medium-terms risks.

     "These risks have not gone away, but the fact that they are not building at

the rate they have been is a positive development," Lowe said.

     At the Q&A session, Lowe said his central message remains one of patience.

     "We are prepared to be patient and we will continue to be patient," he

said, while expressing confidence he will deliver the inflation target on

average.

     "I am confident we will be able to deliver for you an average rate of

inflation of two-point-something," he said.

     That goal is not too far away and the economy has been making progress, he

added.

     "I wouldn't despair," he said, adding that if the target is not met on

average there will be a conversation in the community at large. But that is not

the RBA's central scenario, he added. 

     At the same time, he said delivering around 2.5% inflation will be

troublesome if wage growth remains around 2%. 

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

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