REPEAT:MNI POLICY:RBA Optimistic,Next Cash Rate Move Likely Up

Repeats Story Initially Transmitted at 01:32 GMT Jul 17/21:32 EST Jul 16

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia continued with its optimistic

tone in the minutes of the July board meeting, published Tuesday, and more

importantly, reinstated the line that the next move in the cash is more likely

to be an increase than a decrease.

     Below are the key observations we made from the minutes:

     --After omitting the line that the next move in the cash rate would be up,

rather than down in the June minutes, the RBA reinstated it in the minutes of

the July meeting. The RBA said that the members continued to view the

strengthening economy as likely to deliver further progress in reducing the

jobless rate and returning inflation to target. And "in these circumstances,

members continued to agree that the next move in the cash rate would more likely

be an increase than a decrease." The RBA also said there was no strong case for

a near-term adjustment in monetary policy.

     --It may be noted that while many consider the RBA's language on the

possible direction of the cash rate as a forward guidance, the RBA itself

doesn't see it as a guidance. At an ECB forum last month, Governor Philip Lowe

specifically said the RBA hasn't used forward guidance unlike several other

central banks.

     --RBA's confidence on the direction of the cash rate mainly stems from

three key factors -- the outlook on the labor market, developments in money

markets and the housing market. The RBA continues to believe the outlook for the

labor market is positive and stronger labor market conditions and growing skills

shortages would lead to pick up in wages growth over time. On the money markets,

the RBA is watchful about how persistent the rise in money market rates would be

but is taking comfort from the fact that that the rise in funding costs so far

is low relative to history. On the housing market, the RBA noted the fall in

prices in Sydney and Melbourne but didn't make any comments that suggests it is

concerned.

     --On the other hand, commentary on China was slightly downbeat with the RBA

stating that growth there appeared to have moderated a little, and there was

some uncertainty around how the authorities would respond to the trade-off

between growth target and financial stability risks. Importantly, the RBA also

noted that downside risks to the global growth has increased over the prior

month, and an escalation of trade tensions could harm global growth.

     --There was detailed discussion on the high level of household debt in the

minutes from a special paper prepared for the meeting. The RBA noted that the

high levels of household debt could affect economic outcome, and agreed that

household balance sheets continue to warrant close and careful monitoring as a

result of tighter lending standards.

     --There was also more than usual commentary on housing credit where the RBA

noted that there was both a softening in demand for credit and tightening in

supply.

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