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REPEAT: MNI ANALYSIS: RBA Lowe's Rate Message More Upbeat

Repeats Story Initially Transmitted at 05:10 GMT Sep 21/01:10 EST Sep 21
By Sophia Rodrigues
     SYDNEY (MNI) - After recently giving the clearest signal yet that the next
move in the cash rate would be up, Reserve Bank of Australia Governor Philip
Lowe strengthened his upbeat tone further on Thursday, saying that the economy
looks to be on course to make further progress in the labor market and on
inflation.
     The comments suggest the market may be correct in pricing expectations of a
cash rate hike next year, but other remarks in the speech suggest that pricing
of a nearly 80% chance of a 25bps hike by May may be a bit too optimistic.
     The speech delivered Thursday in Perth to American Chamber of Commerce in
Australia business briefing, follows comment by Lowe on September 5 where he
said that as the economy is making "further progress on both unemployment and
inflation, we could expect the cash rate to move towards this (3.5%) neutral
rate over time." It also follows other positive commentary by the RBA in the
minutes and speeches by senior officials in recent weeks.
     The key change Thursday was a comment conveying the expectation of progress
in the economy, with Lowe saying "as things currently stand, we look to be on
course to make further progress in reducing unemployment and moving towards the
midpoint of the medium-term inflation target."
     On September 5, he said "as we make further progress...."
     In the speech titled "The Next Chapter", Lowe has met the expectations by
discussing not just the future prospects for monetary policy but also the
prospects for the economy.
     Lowe talked about normalizing of monetary conditions as one of the next
chapters of Australia's economic story but cautioned that a rise in global
interest rates has no automatic implications for Australia.
     "Notwithstanding this, an increase in global interest rates would, over
time, be expected to flow through to us, just as the lower interest rates have,"
Lowe said. "Our flexible exchange rate though gives us considerable independence
regarding the timing as to when this might happen."
     Among the positives, he noted growing signs that private investment outside
the resources sector is picking up, positive news on the employment front and
expectation of a gradual increase in inflation back toward the middle of the
central bank's target range.
     He also discussed risks surrounding the outlook, even as he maintained that
the economy does look to be improving.
     "We would like to see the improvement in business investment consolidate
and a continuation of job growth at a rate at least sufficient to absorb the
increase in Australia's workforce. Some pickup in wage growth in response to the
tighter labor market would also be a welcome development. So these are some
areas to watch," Lowe said.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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