MNI INSIGHT: RBA To Consider Cut May 7, But No Done Deal

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia will consider lowering interest

rates when it meets May 7, but a cut in the cash rate is less likely than

financial markets have priced in following lower-than-expected inflation, MNI

understands.

     The Australian dollar slid April 24 after first quarter average underlying

inflation came in at 1.3%, down from a revised 1.7% in Q4 2018 and well outside

the RBA's 2% to 3% target range. But the Bank, which focusses on both prices and

employment, is encouraged by continuing growth in full-time job creation,

despite a modest uptick in March's unemployment rate.

     While headline inflation missed the RBA's forecast, officials focus more on

trimmed mean data -- excluding outlying numbers at both ends of the scale --

where the picture is brighter.

     The first quarter trimmed mean 1.6% smoothed out an 8.7%-fall in prices for

oil and a 7.7% spike in vegetable prices, which were affected by extreme weather

in Queensland.

     The RBA is closely eyeing the declining housing market, which is sapping

rental prices, construction costs and spending on household items, particularly

along the more populous eastern seaboard.

     The RBA has noticed other signs of a weak housing market. Developers are

offering incentives to buyers, and government-funded incentives are also

undermining inflation growth.

     The May decision will be further complicated by the proximity of

Australia's May 18 general election. A rate change during an election campaign

is rare, if not unprecedented, and the RBA will need to balance its economic

mandate against the need to stay above politics.

     The RBA has gradually turned more dovish in recent months, after keeping

official rates steady at a record low 1.5% for more than two years. Markets are

pricing in two cash rate cuts by the end of 2019, according to MNI estimates.

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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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