MNI INSIGHT: Only Big CPI Miss Would Prompt RBA Dovishness

By Lachlan Colquhoun

     LONDON (MNI) - Only a big undershoot in first quarter inflation data on

April 24 would shift the Reserve Bank of Australia closer to meeting market

expectations of one-to-two rate cuts this year, MNI understands, and for the

moment its intention is to wait and see whether recent positive employment and

retail sales data herald a stronger economy.

     While the RBA's forecast is for inflation to slide to 1.4%, from 1.8% in

the fourth quarter of 2018, and GDP has disappointed, record trade surpluses

from an iron ore boom and a likely fiscal boost in the wake of a general

election widely expected in May have reinforced the relatively optimistic view

at the central bank.

     Investors expect the RBA to cut twice this year to 1%, but MNI's

understanding is that this is unlikely, unless inflation falls well short of its

expectations.

     In its February Statement on Monetary Policy, in which it changed its

outlook for the next rates move from likely to be up to a balanced outlook, with

either an increase or a cut possible, the RBA said it expected inflation to

recover to 1.7% by the final quarter of 2019.

     --MAY MEETING

     The Bank, whose next interest rate decision is due on May 7, has held the

cash rate at a record low 1.5% since November 2016, maintaining its policy

settings regardless of market expectations.

     Expectations for the economy among some investment bank analysts are less

rosy, with a number even positing the possibility of quantitative easing. These

point to a speech late last year by RBA Deputy Governor Guy Debelle, who

described QE as a "policy option in Australia, should it be required".

     But Debelle's comments may have been misinterpreted, and QE remains far

from the minds of RBA policymakers, MNI understands

     Even if the economy fell into recession, asset purchases would remain an

option only of last resort, and the RBA believes it has ample leeway for

conventional monetary policy should the need arise, with scope to lower rates.

     While Debelle said QE was a possible tool, his remarks came in a speech on

the Global Financial Crisis, and the RBA view remains not only that asset

purchases are not currently required but that they may not be in the medium or

even long-term future.

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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