MNI INSIGHT: Upcoming Fiscal Boost Key To RBA Policy

By Lachlan Colquhoun 

     SYDNEY (MNI) - The Reserve Bank of Australia expects significant fiscal

measures in April's federal budget, but they will not be factored into in its

May Statement on Monetary Policy, given elections due by the following month,

MNI understands.

     With opinion polls suggesting a change of government is increasingly

likely, additional stimulus is likely regardless by the second half of the year,

mitigating against the possibility of a rates cut even as the economy slows.

While the governing centre-right Coalition is reportedly pondering reductions in

taxes, the opposition Labor Party is focused on improving wage levels and

developing renewable energy, on which they have pledged to spend a further A$15

billion by 2030.

     MNI understands that the RBA is aware that significant fiscal measures --

likely to stimulate consumer spending, either contributing to growth or

insulating the economy from the slowdown - are already in the pipeline from

Canberra, but the Bank's rigorous forecasting processes - along with political

uncertainty - mean that they are yet to be factored in.

     The RBA recently revised down its growth outlook to 2.4% for the year to

June and 3.0% for the 12 months to the end of December, while noting that the

probable next move in interest rates is now more evenly balanced between a cut

and a hike.

     The Coalition government led by Prime Minister Scott Morrison has already

legislated for A$144 billion in tax cuts over six years and these have gone into

RBA forecasts, but the government is reportedly considering a new round in its

budget due on April 2.

     A surging iron ore price, driven by the dam disaster at Vale's mine in

Brazil, is expected to add up to A$4 billion to federal government revenues,

giving it a significant surplus to use as it campaigns for the election.

     --JOBS, JOBS, JOBS

     The government will go into caretaker period immediately the election is

called, putting the budget into limbo.

     Labor is currently leading polls, and, while the RBA is apolitical, its

policies play into two issues on which the central bank is fully engaged: wages

and climate change.

     Appearing before a Parliamentary committee in February, RBA Governor Philip

Lowe blamed sluggish household spending on stagnant wage growth, adding that

productivity gains made across the economy over the past five years had not been

passed on to workers.

     Conditions in the labour market are key to any increase in spending which

will drive inflation from the current 1.8% into the RBA target range of between

2% and 3%.

     Unemployment is at a decade-low 5.0% and the RBA believes the labour market

will continue to tighten, although slowly, and move towards the 4.5% level at

which point wages growth will gain momentum.

     Current RBA estimates are for unemployment to track at 5.0% this year

before easing to 4.9% in 2020 and to 4.75% 'over the next couple of years'.

     Major fiscal measures have the potential to drive unemployment lower if

other factors in the economy remain stable.

--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

[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,MX$$$$]