RBA Errs On Dovish Side, Strong AUD Jaw-boning

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia left the cash rate unchanged

on Tuesday as widely expected but appeared more dovish than expected by pointing

to the appreciating Australian dollar and the dampening effect it could have on

the economy and inflation.

     "An appreciating exchange rate would be expected to result in a slower

pick-up in economic activity and inflation than currently forecast," was the key

line in the RBA statement Tuesday, where it left the cash rate unchanged at 1.5%

as widely expected.

     The RBA said the forecasts for the Australian economy are largely

unchanged. This was expected, though it also downgraded the growth rate compared

to May. The RBA said the central forecast is for the economy to grow at an

annual rate of around 3%. In May, it said growth was expected to increase

gradually over the next couple of years to a little above 3%.

     But the forecasts could come under threat from the rising Australian

dollar, the RBA said. 

     "The higher exchange rate is expected to contribute to subdued price

pressures in the economy. It is also weighing on the outlook for output and

employment," the RBA said, in what could be described as one of its strongest

jawboning comments in a cash rate statement in a while.

     Commenting further on the domestic economy, the RBA said the current high

level of residential construction is expected to be maintained for some time,

before gradually easing.

     It pointed to the outlook for consumption as one source of uncertainty for

the domestic economy. 

     "Retail sales have picked up recently, but slow growth in real wages and

high levels of household debt are likely to constrain growth in spending," the

RBA said.

     On inflation, the RBA said the recent data were broadly in line with its

expectation but reminded that both headline and measures of underlying inflation

are running at a little under 2%.

     "Inflation is expected to pick up gradually as the economy strengthens,"

the RBA said.

     Commentary on the housing market was little-changed versus July, though

this month the RBA also pointed to "some tightening of credit conditions

following recent supervisory measures to address the risks associated with high

and rising levels of household indebtedness.

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

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