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Free AccessMNI: 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
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.