MNI STATE OF PLAY: RBA Optimistic But Hold Stance to Linger

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia appeared more optimistic about

growth prospects for the economy and the labor market but signalled a

hold-for-longer monetary policy stance by saying the progress to achieve its

inflation goal would be gradual.

     As expected, the RBA left the cash rate unchanged after the first board

meeting of the year on Tuesday. This was the 16th meeting in a row that the RBA

left the rate at the record low 1.5% level.

     There were many significant changes in the one-page statement which

included more positive comments about global growth and a mention of pick-up in

growth in the Asian region. This has led to a number of central banks

withdrawing some monetary stimulus, the RBA said.

     One key change was the omission of low wage growth in the discussion on

global inflation. Instead the RBA said global inflation remains low but pointed

to the prospect of it rising due to higher commodity prices and tight labor

markets.

     On the domestic front too, the RBA's comments on the economy were more

positive. But it also said that the further progress in reducing unemployment

rate and having inflation return to target "is likely to be gradual." This is

despite the fact that the RBA continues to expect solid employment growth in the

period ahead, and noted once again about reports that some employers are finding

it more difficult to hire workers with the necessary skills. 

     One lingering concern for the RBA remains the outlook for household

consumption. "Household incomes are growing slowly and debt levels are high,"

the RBA said.

     The RBA made an interest tweak in the commentary on the exchange rate by

pointing to the fact that on a trade-weighted basis, the Australian dollar has

been within the range it has been in over the past two years. It indicates that

the trade-weighted exchange rate has a bigger influence on the forecasts.

     At the same time, the RBA once again warned that "an appreciating exchange

rate would be expected to result in a slower pick-up in economic activity and

inflation than currently forecast."

     There were some changes in the commentary on the housing market with the

most notable one being that the tighter credit standards have been helpful in

containing the build-up of risks in household balance sheets.

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

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