MNI BRIEF: RBA Sees Financial Conditions Easing - Kent

The Reserve Bank of Australia sees the cash rate as still slightly restrictive despite evidence of easing financial conditions, Assistant Governor Chris Kent said Thursday.

Speaking at an industry forum, Kent said it makes sense to use several methods to assess financial conditions given the uncertainty surrounding each measure.

He said model-based estimates of the nominal neutral rate suggest conditions have been tight and are restraining aggregate demand. “Based on the market path, the cash rate is expected to sit within the wide range of central estimates of neutral over the coming period,” Kent said, though he cautioned that “even that range understates the uncertainty.”

While neutral rate estimates are a useful cross-check, “they are not a suitable guide to the near-term path of monetary policy,” Kent added.

Indicators such as mortgage payments and housing credit growth show early signs of responding to this year’s easing in financial conditions, he noted. (See MNI POLICY: RBA Sees 3.6% As Still Likely Restrictive) The RBA’s macroeconomic forecasts, he said, already incorporate a range of such indicators and imply that tightness has eased, which should help keep the economy in balance with full employment and inflation returning toward the midpoint of the target range.

Kent concluded that the outlook remains highly uncertain and said the Bank will continue to reassess it as new data emerge.