MNI INSIGHT: Prospect Of Infla Upgrade May Seal RBA Hike Case

--RBA Committed to 2.5%, But Trajectory Important

By Sophia Rodrigues

     SYDNEY (MNI) - There is an upside risk to the Reserve Bank of Australia's

next inflation forecast and if the June 2020 forecast is revised upwards to

2.5%, with confirmation that it wasn't set to fall beyond that date, then the

case for hike in the cash rate would become clearer.

     That hike could come as early as the end of this year though there's a

greater chance that the RBA will wait until early next year.

     The RBA's updated forecasts for growth, unemployment and inflation will be

included in the quarterly Statement on Monetary Policy, due on May 4. The cash

rate decision and statement on May 1 will be based on the fresh forecasts.

     But even if the June 2020 forecast is unrevised from the 2.25% forecast in

the February policy statement, there is still the possibility of upgrade in the

inflation view which is not reflected in the forecasts, simply because they are

not likely to be extended beyond June 2020.

     This means that if the RBA's inflation trajectory shows progress to 2.5% by

say December 2020, the case for a rate hike by early next year still remains.

--INFLATION SUSTAINABILITY

     It is important to note that the RBA remains committed to the midpoint of

the 2% to 3% target band. And importantly, to consider a hike it wants to see an

inflation forecast which is not only moving towards 2.5%, but remaining around

those levels. But if the inflation path shows a progress to 2.5% then drops back

to 2.25%, a rate hike will clearly be off the table, even for early 2019.

     There is further upside risk to inflation from a likely expansionary

federal budget on May 8, with cuts in both corporate and personal income tax

rates already flagged by the Treasurer, which could result in an upgrade to

growth and inflation forecasts.

     However, with the federal budget due after the forecasts are finalized,

these likely fiscal boosts won't be reflected in the RBA's forecasts, as only

firm budget announcements, not expectations, are included. 

--UPSIDE RISKS

     Australia's Q1 consumer price index inflation data published on April 24

was in line with the RBA's expectation, so there is no downside implication to

inflation forecast from a lower starting point.

     There are though upside risks to the inflation forecast; depreciation in

the exchange rate, an upgrade in non-mining investment forecast, a small upgrade

in view on wage growth and an upgrade in view on global inflation.

     In February, the RBA's forecast for the Australian dollar was $0.78 versus

the U.S. dollar and 64.0 on a trade-weighted basis. On Friday, the AUD stood at

$0.7545 and 62.0 on TWI, so there has been a depreciation since the last policy.

     The RBA cited depreciation as an upside risk to the economy and inflation

in the February statement, as it would make domestically produced goods and

services more competitive and would directly flow through to higher domestic

inflation via higher import prices.

     Since February, the RBA has also upgraded its view on non-mining business

investment, saying in March that there are upside risks to its forecasts for

growth in non-mining business investment over the medium term.

     The RBA also believes that the rate of wage growth may have troughed. In

March, its commentary around wage growth prospects noted wages picking up in an

increasing number of industries over the prior year, and some industries with a

relatively high share of employees on individual agreements were seeing wage

growth pick up.

     On global inflation, the RBA said in April that inflationary pressures were

expected to build in the major advanced economies in the period ahead.

     These upgraded views will now be reflected in the RBA's forecasts published

in this week's policy statement.

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

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