MNI POLICY: RBA SOMP Sees Wages Growth As Rates Key

--Downgraded Growth Forecasts Based On Market Assumption Of Two Future Rate Cuts

By Lachlan Colquhoun

     SYDNEY (MNI) - The strength of the labour market will be the main trigger

for any change in interest rate policy, according to the Reserve Bank of

Australia's quarterly Statement on Monetary Policy published Friday, although it

offered strong hints rate cuts would come as growth forecasts were downgraded. 

     Although the RBA hasn't formally adopted an easing bias, the forecasts in

the latest Statement are based on current market pricing of two rate cuts.

     "Domestic forecasts are conditioned on the technical assumption that the

cash rate moves in line with market pricing, which implies two 25 basis point

cuts to the cash rate," the SOMP noted.

     The SOMP revises RBA forecasts for key economic metrics, with GDP growth

for the year to end of June 2019 now forecast at 1.75%, compared with the

previous forecast of 2.5% and the current actual figure of 2.3%.

     This is expected to increase to 2.75% by the end of the year and remain

stable throughout 2020.

     Earlier this week the RBA left official rates on hold at a record low of

1.5% and the SOMP further articulates the Bank's outlook, centred on sluggish

wages growth flowing through to weaker consumption and dampening inflation and

growth.

     --WAGES A DRIVER

     The SOMP included forecast downgrades for consumption and dwelling

investment as a result of falling property prices, but also on lower household

income due to stagnant wages growth.

     The Australian Bureau of Statistics reports wage price index and

unemployment data next week, with the wage price index in particular focus as

wages growth is critical for higher levels of consumption. Unemployment is at a

decade low of 5.0%.

     Like many economies, Australia is in an unusual period of low interest

rates and low inflation but with a strong labour market without significant

wages growth. This had created a situation in which household incomes remain

low, which the RBA says is a "key source of risk for the economic outlook."

     "Growth in household disposable income slowed to 2% over the year to the

December quarter 2018, well below its long run average," the SoMP says.

     "The prospect of continued low growth in household disposable income

remains a key risk to the outlook for household consumption, especially given

high levels of household debt and the need to service that debt."

     Other indicators which have remained soft include retail sales and dwelling

investment, which the Bank says "is likely to have passed its peak for this

cycle."

     Households' sentiment towards their own finances had also declined over the

past year to below their long run average level.

     CPI Inflation, currently at 1.8%, is expected to dip to 1.75% by June and

end the year at 2%. This is higher than previous RBA estimates.

     Unemployment is forecast to stay at 5% until December 2020, when the RBA

estimates it will fall to 4.75%.

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

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