MNI PREVIEW: RBA Rate Cut Dilemma Ahead Of Federal Elections

--Inflation Clears Ground For Cut, But May 18 Vote Offers Chance For Delay

By Lachlan Colquhoun

     LONDON (MNI) - The Reserve Bank of Australia may yet let election fog clear

and await updated growth data before cutting official interest rates for the

first time since November 2016, despite headline inflation sitting below its

target range.

     The RBA, who next meet on May 7, have focused on inflation and employment

as triggers for monetary policy in recent months, noting in the minutes of the

April meeting that lower inflation and higher unemployment could lay the

foundations for lowering the benchmark rate from the current record low 1.5% --

and data following the last meeting has certainly given policymakers food for

thought.

     Headline inflation measured by the consumer price index slumped to an

annualized 1.3% in Q1, down from 1.8% in Q4 and moving even further away from

the RBA's 2 to 3% target range.

     Alongside that, the unemployment rate also edged higher, edging 0.1 of a

percentage point higher in March to 5.0%, widely expected as a rebound from

statistical anomalies in the previous month.

     --NO CONSENSUS

     Financial markets seized on the inflation data as a justification for a

swift rate cut by the RBA, with swaps pricing in a 60%-plus chance of a cut in

the immediate aftermath of the release, although this has retreated to a 40%

chance currently.

     While analysts expect the RBA to cut rates at some point this year, there

is no clear consensus on Tuesday's outcome, with 13 of 25 seeing a cut next week

and 12 seeing no change.

     It is not only the inflation and jobs data that has offered hope for a rate

cut, with subsequent data confirming the extent of the downturn in the domestic

housing market.

     A report this week by S&P Global Ratings showed that arrears in Australian

prime residential mortgage-backed securities have risen to 1.47% from 0.02% in

March, while housing prices in every capital city continued to slide in April,

down by an average 0.5%.

     --ELECTION

     The RBA must also factor the May 18 general election into its rate cut

deliberations and what impact a cut could have on a hard-fought campaign where

the health of the economy has been a central issue.

     Although not unprecedented for the Bank to move on rates before an

election, it may see any pre-vote move as compromising the perception of its

independence.

     It may be that the election, and a desire to see first-quarter GDP data --

due the day after the June meeting -- could stay the RBA's hand for now.

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

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

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