REPEAT: MNI: RBA On Hold; Capacity, Retail Competition Issues

Repeats Story Initially Transmitted at 07:06 GMT Feb 6/02:06 EST Feb 6

--Positive Data Removed Downside Risk to RBA Cash Rate

By Sophia Rodrigues

     SYDNEY (MNI) - Spare capacity in the labor market and strong competition in

the retail space are the Reserve Bank of Australia's top two concerns likely to

keep the cash rate on hold for longer, despite increased optimism from global

and domestic data in the last two months.

     The only change that has come about following the more positive outlook is

that it has removed the small downside risk to monetary policy that the RBA saw

at the end of 2017.

     Earlier Tuesday, the RBA left the cash rate unchanged at 1.5%, as widely

expected, and issued a statement that was more optimistic than the previous one.

However, it made clear that this is unlikely to lead to a hike in interest rates

anytime soon -- in fact, on-hold-for-longer seemed to be the key message from

the statement.

     "The low level of interest rates is continuing to support the Australian

economy. Further progress in reducing unemployment and having inflation return

to target is expected, although this progress is likely to be gradual," the RBA

said in the last paragraph of its statement.

     The RBA's main worry is about spare capacity in the economy because that is

important for wage growth to accelerate, which could then be expected to pass

through to inflation. And while the RBA continues to expect solid growth in

employment over the period ahead, it is also aware that the participation rate

could follow last year's trend of a "significant rise." If that happens, the

unemployment rate could take longer to reduce.

     --GREATER SPARE CAPACITY

     As of now, based on the jobless rate of 5.5% and the estimated full

employment rate of 5.0%, spare capacity is estimated to be around half a

percent. But if the full employment rate turns out to be lower than 5.0%, as

experienced by other advanced economies, the current spare capacity could be

higher than half a percent.

     It is this estimate of capacity and the worry that it could be

higher-than-estimated, that is making RBA less confident about prospects for

inflation.

     The RBA has an additional concern -- the strong competition in the retail

sector. This was seen in the Q4 consumer price index inflation data released

last week. The data showed that headline inflation was close to RBA's

expectation but the details were soft, mainly reflecting the impact of strong

retail competition.

     Until the RBA sees enough evidence that inflation is progressing close to

the mid-point of its 2% to 3% target band, it is unlikely to consider a rate

hike in its debate. This means the monetary policy stance is likely to remain

firmly on hold, with neither hike nor cut likely to be part of the rate decision

debate until at least the end of the year.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com