REPEAT: MNI ANALYSIS: RBA Easing Chance Fades As Debt Worry Up

Repeats Story Initially Transmitted at 01:48 GMT Aug 15/21:48 EST Aug 14

--RBA No Longer Sees Labor Market As Needing Close Monitoring

--RBA Balancing High Household Debt Risk Amid Low Inflation

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's concern about high household

debt appears to have increased further, reducing the prospect of any further

easing in monetary policy in the near term, as fading worries about employment

growth gives the central bank the flexibility to tolerate low inflation for

longer.

     But if wage growth fails to accelerate and the Australian dollar

appreciates further, the RBA's patience could be tested and easing could come

back on the table, provided there is some respite from risks around household

balance sheets. The risks have increased further because the economy is relying

on a low level of interest rates to support growth, unlike in the past when the

exchange rate also helped in the rebalancing of the economy.

     The minutes of the August board meeting, published Tuesday, showed the RBA

no longer sees developments in the labor markets as continuing to warrant

careful monitoring. Instead the RBA mentioned "household balance sheets as

continuing to warrant careful monitoring" along with conditions in the housing

markets.

     This is likely due to the fact that overall housing credit growth has

continued to outpace the relatively slow growth in household incomes despite the

rise in mortgage rates for housing investors and slowing in their mortgage

growth.

     The RBA also noted that while conditions in the Sydney and Melbourne

housing markets had eased somewhat, price growth in these two cities had

remained relatively strong.

     An elevation in concerns about the housing market and household balance

sheets means RBA will continue to be patient with low inflation outcomes.

     As Governor Philip Lowe said in his opening comments to the House of

Representatives Standing Committee on Economics last Friday, "The fact that the

unemployment rate has been broadly steady has allowed us this patience. We have

preferred a prudent approach, which is most likely to promote both macroeconomic

and financial stability consistent with the medium-term inflation target."

     Lowe's comments were echoed in the minutes, where the RBA said that it held

the stance of monetary policy unchanged at it August meeting after taking into

account available information and "the need to balance the risks associated with

high household debt in a low-inflation environment" 

     However, there may be limits to how long the RBA can balance these risks.

Of the various uncertainties, the two key ones are the prospect of a further

rise in the exchange rate as well as wage and price inflation failing to

accelerate in line with forecasts.

     The RBA said its forecasts for output growth and inflation were largely

unchanged from three months earlier but those were conditioned on the assumption

of no change in the Australian dollar during the entire forecast period which

extends to end-2019.

     "This assumption was one source of uncertainty," the RBA said.

     The RBA also pointed to the risk that wage and price inflation would follow

the pattern experienced in other economies around the world, where the rise was

not as much as expected despite these economies being close to full employment.

     This "raised the possibility that low inflation in Australia might also

persist longer than forecast," the RBA said.

     The risk of low inflation may also be high due to the fact that the

Australian Bureau of Statistics is scheduled to update the weightings in its CPI

basket. "This was expected to lower reported CPI inflation because the weights

of items whose prices had fallen were likely to be higher, whereas the weights

of items whose prices had risen were likely to be lower."

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