MNI RBA ANALYSIS: Cash Rate Seen Unch but Shift in AUD Comment

--All 21 Analysts Surveyed by MNI See RBA Cash Rate Unchanged at 1.5% Tuesday

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is widely expected to leave

the cash rate unchanged at 1.5% Tuesday and maintain an overall neutral tone.

But there could be shift in language on the exchange rate that may pose downside

risk for the Australian dollar.

     There may be other tweaks in the statement too, mainly on the labor market,

inflation and growth.

     The cash rate decision will be based on updated forecasts for the economy

that the RBA staff will prepare for the quarterly Statement on Monetary Policy,

due on Friday.

     Unlike in the past few quarterly statements, the RBA will face a challenge

while updating growth and inflation forecast because it has to price in an

elevated exchange rate compared with May, and a rate hike. 

     The RBA will incorporate the prevailing exchange rate in its forecasts but

it has some discretion on whether to build in a rate hike or an unchanged cash

rate, though it is likely it may not use the latter option.

     The Australian dollar is almost 7% higher vs the greenback and 5.5% on a

TWI basis versus the RBA's assumption in the previous quarterly Statement.

     The RBA's preference will be to make little change to forecasts but that

could still mean the forecast in May that "growth is expected to increase over

the next couple of years to be a little above 3%" could be slightly downgraded.

The downside risk for growth is likely to come from a small downgrade in housing

construction outlook and household consumption but the upside is likely from

state and central government spending.

     Maintaining the 2% to 3% forecast for underlying inflation in June 2019

could be a challenge too, given the elevated Australian dollar so they may get

slightly lowered too.

     But in the statement Tuesday the RBA may still characterize these

downgrades as "little change".

     The bigger focus will, therefore, be on the commentary on the exchange rate

as the RBA may seek to jawbone it lower. 

     It is possible the reverts to a language last used in the April 2015 cash

rate statement when it said "A lower exchange rate is likely to be needed to

achieve balanced growth in the economy." 

     All 21 economists in MNI poll agree with the market consensus that the RBA

would leave the cash rate on hold at 1.5% for the eleventh meeting in a row. The

cash rate decision is due at 1430 hours local time Tuesday.

     Below is a table of forecasts for the cash rate decision and the outlook.

                    August                                        Outlook

-------------------------------------------------------------------------

NAB                   Hold                            Hold until mid-2019

ANZ                   Hold                                Hold for longer

Westpac               Hold                               Hold 2017, 2018.

CBA                   Hold                           Hold until late 2018

Goldman Sachs         Hold  25bps hike in Nov. 2 hikes 2018. 3.0% by 2020

Citigroup             Hold                       Hold well into next year

JPMorgan              Hold                           50bps cut in H1 2018

HSBC                  Hold                          25bps hike in Q1 2018

TD Securities         Hold                              25bps hike in May

UBS                   Hold                                Hike in H2 2018

Deutsche Bank         Hold                             Hold 2017 and 2018

AMP Capital           Hold                       Hold until 2018 or later

Moody's               Hold                                           Hold

St. George            Hold                                Hold for longer

Macquarie             Hold                          25bps cut in November

Nomura                Hold                         25 bps cut in February

RBC Capital           Hold                                Hold for longer

BankAm-ML             Hold                         25bps hike in Feb 2018

Morgan Stanley        Hold                                 Hold into 2019

Standard Chartered    Hold                              Hold through 2017

Wells Fargo           Hold                            Hold well into 2018

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

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