RBA Ellis: Global Econ Pickup Key For Australia Prospects

--Housebold Balance Sheet A Risk In Case Of Some Other Shock

By Sophia Rodrigues

     SYDNEY (MNI) - The turning point in the pickup of the global economy was

around the end of last year, and that is positive news for the Australian

economy, Reserve Bank of Australia assistant governor Luci Ellis said in a

speech that once again confirms the central bank sees the next cash rate move to

be up.

     The speech, delivered Wednesday at a lunchtime briefing to the Australian

Business Economists in Sydney, builds on recent upbeat comments from the RBA on

growth prospects for the economy.

     On Sept. 5, Governor Philip Lowe gave the clearest signal that the next

move on the cash rate is likely to be up when he said that as Australia makes

further progress on both unemployment and inflation, the cash rate could be

expected to move toward the 3.5% neutral rate over time.

     In the speech Wednesday, Ellis said the global economy is looking better

than it did a year ago. 

     "The turning point was around the end of last year. While it doesn't seem

to have picked up further recently, neither is this expansion a flash in the

pan. That is positive news for the Australian economy, too," she said.

     There are also risks, and for Australia the key one is the high level of

household balance sheet, Ellis said, but added that this is only a risk if some

other shock should come along.

     "Of itself, the level of indebtedness is unlikely to be a triggering factor

that sparks a negative outcome. But it is an important consideration in the

context of other triggers," Ellis said.

     Among other risks related to global factors, Ellis said the first such risk

is geopolitical, but that has receded in Europe and specifically the euro area.

Against that, geopolitical risks in Asia have increased, but these are low

probability, high-impact events that do not affect the central scenario until

something actually happens.

     Financial risks have become less pertinent at the moment as the urgency of

the search for yield globally has become less pressing, Ellis said.

     A final risk is the global monetary policy environment, together with the

economic and market reactions to it, as prices and wage growth remain low, Ellis

said.

     "Expansionary monetary policy and less contractionary fiscal policy have

supported economic recoveries. Some economies are now thought to be close to

full employment and productive capacity. Yet so far, growth in both prices and

wages has remained quite low," she said.

     Ellis said wage growth and inflation could take a while to pick up, but

that inflation would stay low despite reasonable growth in a range of economies,

posing a challenge to policymakers.

     "In that scenario, policy still needs to remain appropriately expansionary

while avoiding further build-up of leverage and financial risk. Calibrating the

pace of withdrawal of stimulus will be no easy task," Ellis said.

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

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