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RBA board concerned about labor market, exchange rate

The Reserve Bank of Australia’s August meeting minutes show that the central bank continues to be uncertain regarding the labor market. The minutes stated that the board members noted that “there continued to be considerable uncertainty about momentum in the domestic labor market and the extent to which domestic inflationary pressures would rise over the next few years”.

These worries are linked to the extent of slack at present in the labor market along with measures of unemployment implying that overall labor underutilization continues to be high, said ANZ in a research note.

Furthermore, the RBA is worried that while the growth of LNG export capacity would considerably contribute to growth in the years ahead, its low labor intensity would not see a similar stimulus to employment. Also, the RBA board is concerned of a negative feedback loop from housing into inflation, stated ANZ.

According to the meeting minutes, the risk of housing oversupply was significant for the outlook of inflation as housing costs make up a considerable share of the CPI basket. The pressure on housing costs as gauged by the consumer price index is expected to come through in rents and new house purchase costs. New house prices and rents together account for 16 percent of the inflation basket and are the two major components of the CPI, noted ANZ.

The effect of international monetary policy on the exchange rate continues to be a concern for the RBA. The board stated that alterations to likelihood of central bank’s policies continue to have a vital influence on global exchange rate developments, after noting that a rate risk in the US was not anticipated until late 2017 and additional easing was expected in the UK and Europe. The minutes noted that the board reiterated the comment that a strengthening AUD might make the necessary economic adjustments challenging.

Even if the RBA minutes did not have any clear forward guidance, the central bank is expected to maintain its strong easing bias. As inflation is likely to remain lower than or at the bottom of the RBA’s target band of 2 percent to 3 percent target for the total forecast period, the easing bias is likely to be quite strong, said ANZ.

The cash rate is likely to remain same at 1.5 percent; however, there is an evident risk of additional easing due to the low inflation outlook, added ANZ. The Australian central bank might intend to assess the effect of May and August cuts on the housing and labor markets. The exchange rate is also expected to continue to a vital factor in determining monetary policy given that the AUD strengthened after the August rate cut and is close to the high level reached in April.

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