MNI INSIGHT: Worried by China, RBA Could Cut Growth Forecast

--February Statement On Monetary Policy Could See Growth Forecast Cut

--RBA Still Holds To Belief Next Move In Rates Will Be Up

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia is re-examining its assessment

of downside risks from the global economy and a slowing China, and could revise

down its 2019 Australian GDP growth forecast in its February Statement on

Monetary Policy, MNI understands.

     But the Bank is being cautious in interpreting economic signals and

requires more evidence of a downturn than is currently available before changing

its outlook on the next move on rates. The RBA Board meets for the first time

this year on Feb. 4, and will outline more of its current thinking in its

Statement on Monetary Policy due on Feb. 9, when a modification is possible to

the current 2019 GDP forecast of 3.25%.

     The Bank has held official rates steady at a record low 1.5% since November

2016, and continues to believe that the next movement is likely to be up,

although this is expected in the medium to longer term. Any change in the RBA's

interest rate outlook is likely to be gradual and telegraphed well in advance.

     In the meantime, the RBA has welcomed Australian Labour Force data this

week, which showed December's unemployment rate fall by an unexpected 0.1

percentage point fall to a seasonally-adjusted 5.0%, back to the same level as

October and the lowest since 2011.

     The economy added 21,600 jobs for the month and although all of the new

posts were part time the data is consistent with the RBA's view that a tighter

labour market will flow through to higher wages and consumer spending, providing

fuel for inflation.

     --RBA MAINTAINS BENIGN VIEW OF ECONOMY

     The Bank places a higher priority on Labour Force data than it does on some

other economic statistics, such as falling property prices, which have been

seized upon by many outside of the bank as evidence that the economy is cooling

rapidly, with some calls for the RBA to cut official interest rates.

     While fully aware of the volatile housing market and other factors such as

the weaker Australian dollar, MNI understands the RBA is maintaining its more

benign view of the outlook for the domestic economy.

     Third quarter growth for 2018 slowed to an annualised 2.8%, down from 3.4%

in the second quarter, but the RBA is encouraged that the more recent labour

market data shows that employment is still growing.

     Consumer Price Index data for the December quarter will be released next

week, and this forms another critical part of the RBA's outlook.

     Inflation is currently tracking at 1.9% and the Bank has publicly said it

expects a gradual rise of 2.25% by 2020, creating the conditions for a change in

policy and ultimately an interest rate rise.

     The market is expecting a lower inflation number next week, a result which

would go against the RBA outlook and intensify calls for an official interest

rate cut.

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

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