REPEAT: MNI ANALYSIS: Market Optimism on RBA Hike Misplaced

Repeats Story Initially Transmitted at 05:50 GMT Jan 29/00:50 EST Jan 29

--Household Balance Sheet Worry Means Hike Not on RBA's Radar

By Sophia Rodrigues

     SYDNEY (MNI) - For much of last year, the debate over the Reserve Bank of

Australia's cash rate decision was between leaving the rate on hold or lowering

it further, and the decision always swayed in favour of the former due to

worries about household balance sheets. Ironically, that same worry would

prevent the RBA from raising the cash rate anytime soon.

     In the former case, the RBA refrained from cutting the cash rate because of

worries that it would lead to a further build-up of debt. Now it will not hike

because it would hinder the economy's progress towards acceleration in wage

growth and thus household income, hurting household consumption. 

     So the belief that the cash rate debate would shift and would be between

on-hold and hike as early as May appears misplaced. There are greater chances

that the RBA's cash rate is likely to remain on hold at 1.5% for most of this

year, and any hike, if it happens, is unlikely before the end of the year.

     The money market is currently pricing a 20% chance of a 25bps hike by May

and is pricing almost an entire hike by November.

     --FINANCIAL STABILITY

     It was in the minutes of the June board meeting last year that the RBA

explicitly discussed how consideration of financial stability is affecting its

monetary policy decision. 

     "The Bank has responsibility for promoting financial stability within its

flexible medium-term inflation targeting framework. Over recent times, with

interest rates at low levels, the Board has set monetary policy to support the

economy in its transition following the mining investment boom, while also

paying close attention to trends in household borrowing and related financial

stability considerations," the RBA said. 

     The key point in that discussion was that the RBA was willing to be patient

with inflation staying below its target for longer, rather than lowering the

cash rate and risking financial instability.

     The theme continued until the last board meeting of 2017, with the RBA

reiterating that household balance sheets warranted careful monitoring, and the

outlook for household consumption continued to be a significant risk, given that

household incomes were growing slowly and debt levels were high.

     The easing in housing market conditions and some slowing in household

credit has lowered the risk on household balance sheet as far as the debt side

of the balance sheet is concerned, but the RBA is mindful that for the risks to

reduce to a comfortable level, it is the income side that needs to grow.

     For that to happen, wage growth needs to accelerate and the preconditions

for that are further growth in employment, a further fall in the jobless rate

and reduction of spare capacity in the economy. 

     A rise in household income is important for households to withstand higher

mortgage rates while maintaining their spending patterns. For the RBA this is

important for its consumption and growth forecasts to come to pass.

     --NAIRU LEVEL?

     The recent labour force reports published by the Australian Bureau of

Statistics have been better than expected but this trend needs to continue in

2018 and lead to a fall in the jobless rate towards 5% -- the rate widely

regarded as full employment or the non-accelerating inflation rate of

unemployment (NAIRU). The RBA will be watchful when this happens because it is

no longer certain that the full employment rate is still 5% or if it may have

fallen further.

     If the rate has gone below 5% then it would take longer for wage growth to

accelerate and it would have implications for both inflation and growth, and

also household balance sheets.

     This means the labour market has to continue its recent positive trends and

lead to a rise in wage growth for the RBA to even consider a rate hike in its

cash rate debate.

     Strong global growth and the fact that global central banks are stepping

back from their highly accommodative policies are some of the positives that the

RBA will take into account in its monetary policy decisions. But the RBA has

consistently said that it will not automatically follow other central banks.

     "Just as the policy rate in Australia did not need to decline to the very

low levels seen in other parts of the world, the fact that other central banks

increase their policy rates does not automatically mean that the policy rate

here needs to increase. The policy rates in both the US and Canada still remain

below that in Australia," Deputy Governor Guy Debelle said in a speech in July

last year.

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