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REPEAT: MNI: RBA MonPol Risks Lean To Upside; Global Infla Key

MNI (London)
Repeats Story Initially Transmitted at 11:40 GMT May 15/07:40 EST May 15
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of Australia sees upside risk to monetary
policy from higher-than-expected global growth and inflation, but a more
balanced risk -- albeit with a slight upside tilt -- on the prospects for a
pick-up in local wages and inflation.
     However, tempering the upside potential is the risk from a possible further
tightening in lending standards, where the biggest impact could be on
consumption via slowing house prices. An additional risk to consumption is the
possibility that banks would pass on a rise in funding costs to mortgage rates,
though in recent days that risk has diminished.
     Overall, the risk for RBA monetary policy remains tilted slightly to the
upside, though this could shift in the next few months if downside risks become
more prominent.
     --GLOBAL INFLATION
     In a speech earlier Tuesday, Deputy Governor Guy Debelle cited the
inflation outlook as a key uncertainty on the global front that could have
upside implications for domestic monetary policy because of the potential
downward impact on the Australian dollar.
     Interestingly, in a speech on May 1, RBA Governor Philip Lowe discussed
risks around the general outlook, but didn't mention the global inflation
outlook as one of those risks, citing only the possible escalation of global
trade tensions and China as the global risks.
     Debelle not only talked about the possibility of global inflation rising
more than expected, but also that the neutral policy rate could gradually rise.
     The upside risk on global inflation is not just because some of the
advanced economies, mainly the U.S., are very close to full capacity, but also
because of the recent rise in oil prices. The RBA sees the oil price rise as
mainly a global story, but with important implication for the Australian
economy.
     The deputy governor noted that in the U.S. the fiscal stimulus is being
imparted when the economy is very close to full capacity. "This is a similar
situation to that in the late 1960s and could lead to more inflation in the US
than currently anticipated."
     If global growth and inflation rise more than expected, it could lead to a
depreciation of the Australian dollar, and boost domestic output and lead to a
faster rise in inflation, he said.
     --DOMESTIC BLISS
     On local wage and inflation prospects, the RBA sees the risks as broadly
balanced but with a mild upside tilt. The central scenario is that wage growth
and inflation would pick up gradually as spare capacity is reduced only slowly.
     The RBA has on several occasions in the past raised the possibility that
the NAIRU could be lower than estimated. But in the May Statement on Monetary
Policy it may have already accounted for the possibility that full employment is
lower than 5%.
     As such, the forecasts may already be incorporating the downside risk,
leaving open the potential for upside risk from factors including the
possibility wage growth could pick up faster if local headline inflation rises
more than expected due to higher global inflation.
     However, there are downside risks too, with the biggest risk a relatively
new one and could affect both the outlook for household consumption and dwelling
investment. This risk is from a possible further tightening in lending standards
in Australia, particularly in the context of the current high level of public
scrutiny of banks, which would affect household borrowing and spending.
     A possible slowing in credit growth due to tighter lending standards would
have implication for house prices. The decline in wealth effect could
potentially make households' cautious in their consumption. 
     And for the RBA's monetary policy, that is a significant risk given their
outlook is for household consumption to continue its recent solid pace of
growth.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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