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REPEAT: RBA Errs On Dovish Side, Strong AUD Jaw-boning

Repeats Story Initially Transmitted at 04:58 GMT Aug 1/00:58 EST Aug 1
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of Australia left the cash rate unchanged
on Tuesday as widely expected but appeared more dovish than expected by pointing
to the appreciating Australian dollar and the dampening effect it could have on
the economy and inflation.
     "An appreciating exchange rate would be expected to result in a slower
pick-up in economic activity and inflation than currently forecast," was the key
line in the RBA statement Tuesday, where it left the cash rate unchanged at 1.5%
as widely expected.
     The RBA said the forecasts for the Australian economy are largely
unchanged. This was expected, though it also downgraded the growth rate compared
to May. The RBA said the central forecast is for the economy to grow at an
annual rate of around 3%. In May, it said growth was expected to increase
gradually over the next couple of years to a little above 3%.
     But the forecasts could come under threat from the rising Australian
dollar, the RBA said. 
     "The higher exchange rate is expected to contribute to subdued price
pressures in the economy. It is also weighing on the outlook for output and
employment," the RBA said, in what could be described as one of its strongest
jawboning comments in a cash rate statement in a while.
     Commenting further on the domestic economy, the RBA said the current high
level of residential construction is expected to be maintained for some time,
before gradually easing.
     It pointed to the outlook for consumption as one source of uncertainty for
the domestic economy. 
     "Retail sales have picked up recently, but slow growth in real wages and
high levels of household debt are likely to constrain growth in spending," the
RBA said.
     On inflation, the RBA said the recent data were broadly in line with its
expectation but reminded that both headline and measures of underlying inflation
are running at a little under 2%.
     "Inflation is expected to pick up gradually as the economy strengthens,"
the RBA said.
     Commentary on the housing market was little-changed versus July, though
this month the RBA also pointed to "some tightening of credit conditions
following recent supervisory measures to address the risks associated with high
and rising levels of household indebtedness.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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