REPEAT:RBA Lowe: Rate Cld Move Toward Neutral On Econ Progress

--Investment Outlook Brightened, Inflation Troughed, Says Lowe

By Sophia Rodrigues

     SYDNEY (MNI) - As the Australian economy makes further progress on both

unemployment and inflation, the cash rate could be expected to move toward the

current estimate of a neutral rate of 3.5%, Reserve Bank of Australia Governor

Philip Lowe said Tuesday, in the clearest signal that the next move on the rate

is likely to be up.

     Lowe was speaking at the RBA board dinner, which followed the RBA meeting

and release of the September cash rate decision earlier Tuesday.

     Lowe made the comments in the context of the neutral rate discussion, which

was the special topic at the RBA's July board meeting and was included in his

remarks Tuesday, although Lowe warned yet again that the remarks carry no

particular message about the short-term outlook for monetary policy.

     Still, the comments taken together with the RBA's slightly more upbeat

assessment on the economy and Lowe's answers at Parliamentary testimony in

August suggest the RBA is getting increasingly comfortable in signaling that the

next move in the cash rate is more likely to be up than down.

     "There are scenarios where rates could move down and there are scenarios

where we could stay here for a long period of time, and obviously, scenarios

where we could go up," Lowe had said in reply to a question at the Parliamentary

testimony on Aug. 11. "It's more likely that the next move will be up rather

than down, but it's quite some time away if things play out as we expect.

Inflation's going to be below two and a half per cent for quite a while. The

unemployment rate is still a bit high."

     Lowe's overall comments on the economy were more upbeat than before.

Employment has picked up over recent months, the investment outlook has

brightened and inflation has troughed, Lowe said.

     For now, however, stimulatory monetary policy continues to be appropriate,

Lowe said, adding that it will be some time before Australia hits full

employment and underlying inflation reaches the midpoint of the 2% to 3% target

band.

     The RBA has not attempted to achieve faster progress on unemployment and

inflation through lower cash rates as it would have added to the risks in

household balance sheets.

     "So the board has been prepared to be patient and has not sought to overly

engineer or fine-tune things. In our view, the balance we have struck is

appropriate and it is likely that the economy will pick up from here as the drag

from declining mining investment comes to an end," Lowe said.

     "Our central scenario is for growth of around 3% over the next couple of

years and for the unemployment rate to move lower gradually," he added.

     The RBA has been paying close attention to trends in household borrowing,

given the already high levels of debt, Lowe said.

     The recent supervisory measures from the Australian Prudential Regulation

Authority have played a constructive role and most lenders are now operating

comfortably within new restrictions, and these measures are not unduly

restraining the supply of overall housing credit, he added.

     The Tuesday board meeting contained a special discussion on the Chinese

economy, and the RBA discussed the difficult tradeoff facing the Chinese

authorities addressing the high and rising levels of debt while achieving "still

quite high" growth targets.

     "It remains an open question as to whether both of these objectives can be

achieved. Here in Australia, we have a strong interest in the right balance

being achieved," Lowe said.

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