UPDATE:RBA: Balancing Monetary Stimulus Benefit With Debt Risk

--Updated With Comments on Next Move For Cash Rate

By Sophia Rodrigues

     MELBOURNE (MNI) - The Reserve Bank of Australia has been patient with its

monetary policy decisions as it continues to strike a balance between the

benefit of adding more stimulus to the economy versus the medium-term risk of

rising levels of debt relative to income, Governor Philip Lowe said Friday.

     Lowe made the comments in his opening speech to the House of

Representatives' Standing Committee on Economics here.

     A broadly steady jobless rate has given the RBA flexibility to be patient,

Lowe said.

     The RBA's current cash rate setting of 1.5% is supporting employment growth

and a return of inflation to around its average rate of the past couple of

decades, he added. 

     "The Board is seeking to do this in a way that does not add to the

medium-term balance-sheet risks facing the economy. It has been conscious that a

balance needs to be struck between the benefits of monetary stimulus and the

medium-term risks associated with rising levels of debt relative to our

incomes," Lowe said.

     "The fact that the unemployment rate has been broadly steady has allowed us

this patience. We have preferred a prudent approach, which is most likely to

promote both macroeconomic and financial stability consistent with the

medium-term inflation target," Lowe said.

     One factor that is influencing the outlook for both economic growth and

inflation is the exchange rate, Lowe said, with the recent rise in the

Australian dollar reducing the price for imported goods and weigh on the outlook

for domestic output and employment.

     "Further appreciation, all else constant, would cause a slower pick-up in

inflation and slower progress in reducing unemployment," Lowe said.

     Two things the RBA continues to watch closely are household spending

behavior and the housing market, he said.

     The household sector is dealing with lower growth in real wages and at the

same time with higher levels of debt relative to income. An additional headwind

is higher electricity prices.

     "This all means that consumer spending behaviour is something we continue

to watch carefully," Lowe said.

     In the question and answer session, Lowe was asked what the next move for

the cash rate could be.

     He said market pricing showed there is a possibility that the next move

would be up, rather than down, which was reasonable. But he also added that

there could be scenarios where the cash rate could move lower and scenarios

where it could be unchanged for longer.

     In any case, any move higher could be some time away, Lowe said. 

     Asked if the RBA is happy with the impact of the steps on the housing

sector taken by the Australia Prudential Regulation Authority in recent months,

Lowe said they are "having enough impact for the time being."

     The steps have slowed the growth of lending for investor housing and

interest-only housing loans, he said. Overall mortgage growth was also slowing

and "doesn't look like it will go higher any time soon," he added.

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

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