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Free AccessUPDATE:RBA: Balancing Monetary Stimulus Benefit With Debt Risk
--Updated With Comments on Next Move For Cash Rate
--More Updates on Forex Intervention
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.
On a question on whether and at what level the RBA would consider
intervention in the foreign exchange market, Lowe said that RBA would only
intervene in an extreme situation and currently the market is "not near" such an
extreme situation.
Lowe repeated his comments in the speech that a lower Australian dollar
would be more helpful, both to boost employment and to cause faster rise in
inflation.
Luci Ellis, RBA Assistant Governor for Economics, testifying before the
same parliamentary panel, said the RBA doesn't expect non-mining investment to
pick up strongly any time soon.
The RBA forecast for growth to rise above trend is based mainly on the fact
that mining would be less of a drag on growth, coupled with the expectation that
household spending would strengthen due to employment growth, Ellis said.
Most of lawmakers' questions were focused on wage growth. Lowe said that
his biggest concern is that "wage growth would be too low for too long" and is
not worried that wage growth might pick up sooner.
On the housing market, Lowe said that he's been surprised that growth in
rentals had been slower than expected but looking ahead said he expects rental
growth to remain "very low" as more dwelling supply enters the market.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]
To read the full story
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Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.