**MNI POLICY: RBA Statement Dovish Despite Progress Narrative

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia left the cash rate on hold at

1.5% Tuesday as expected by both the markets and the economists. This was the

22nd straight meeting that the cash rate has been left on hold. The RBA last

moved the rate in August 2016 when it lowered by 25 basis points to 1.5%.

     Following are the five key observations we made from the RBA's cash rate

statement:

     --As flagged in MNI State of Play, the RBA maintained its glass-half full

approach and reiterated that the outlook remains for further progress in

reducing unemployment and returning inflation to target. However, if viewed

closely, the statement is more dovish compared to July. 

     --The RBA acknowledged that growth in China has slowed a little. This is a

significant change from July when it said the Chinese economy continues to grow

solidly. The downgrade means the RBA is likely to lower outlook for trading

partner growth in the quarterly Statement on Monetary Policy, due Friday.

     --The RBA said inflation is likely to be higher in 2019 and 2020 that

currently -- an outlook that shows it is making progress towards the inflation

goal. However, it lowered outlook for 2018 inflation to 1.75% from "bit above

2%" because of "once-off" declines in some administered prices expected in Q3

inflation.

     --As expected by MNI, the RBA maintained optimism on the labor market and

now expects the jobless rate to decline over the next couple of years to around

5%. Previously, the RBA's outlook was for jobless rate to decline to 5.25%. It

appears the RBA's SOMP on Friday may show jobless rate falling to 5% by December

2020.

     --There was a lot of interesting commentary around housing market and the

mortgage rate. The RBA acknowledged conditions in Sydney and Melbourne housing

markets have continued to ease and omitted the line on nationwide prices.

Significantly, the RBA pointed to rent inflation remaining low. The RBA noted

that money market rates are higher than the start of the year but have declined

somewhat since the end of June. But they hadn't fed through into higher retail

deposit rates, and while some lenders raised mortgage rates, the average

mortgage rate was still lower than a year ago. The RBA also pointed to

competition for borrowers of high credit quality.

     --The RBA maintained the outlook for GDP growth in 2018 and 2019, citing

support from non-mining business investment and higher levels of public

infrastructure investment. The RBA repeated that outlook for household

consumption remains a source of uncertainty. The RBA added this month that

drought has led to difficult conditions in parts of the farm sector. 

     --The RBA pointed to uncertainty from the direction of international trade

policy in the U.S. but once again only mentioned in terms of global outlook. It

omitted the line on emerging market economies, where last month it said there

have been some strains but largely for country-specific reasons.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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