MNI STATE OF PLAY: No Festive RBA Hike Likely, Focus on 2019

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia is unlikely to hike rates when

it meets Tuesday, with the Board leaving its official cash rate unchanged at a

record low 1.5%.

     Rates have been unchanged since August 2016 and the RBA has consistently

defended its policy stance as a factor in the gradually improving economy, with

growth tracking at around 3.5% and unemployment at 5.0%, the lowest this decade.

     Recent monetary policy statements from the Bank have suggested the next

move in rates will be up if the economy improves as expected, and particularly

if inflation moves from the current annual rate of 1.9% and into the target

range of 2% and above.

     "If the economy continues to move along the expected path, then at some

point it will be appropriate to raise interest rates," RBA Governor Philip Lowe

told a public event last month.

     Lowe, however, put a caveat on this by saying that any rise was dependant

on "stronger growth in household incomes". And while other economic indicators

are positive, wages growth has been sluggish.

     --DOWNSIDE RISKS

     The RBA is also closely watching a number of factors it has identified as

downside risk, such as an escalation in the trade war between China and the U.S.

and also the domestic housing market.

     The reported trade truce between China and the U.S following the weekend

G20 summit in Buenos Aires is positive for Australia, as China is the country's

number one trading partner. But the housing market continues to be problematic,

with property prices falling faster than at any time since the Global Financial

Crisis.

     Building approvals data from the Australian Bureau of Statistics this week

showed a seasonally-adjusted 1.5% fall in the value of new dwelling commitments

approved in October. While the private house approvals were in positive

territory, up 2.7% month on month, the apartment building boom appears to have

run out of momentum with the number of approvals down 4.8%.

     The RBA will be watching closely to see how the falling property market

impacts on household spending and ultimately impacts on inflation and economic

growth.

     Growth has been driven by strong exports of Liquefied Natural Gas (LNG),

with major projects coming on stream after years of development, but there is a

question mark over whether growth is evenly spread through other sectors of the

economy.

     --CURRENCY STRENGTH

     The RBA is also closely watching the value of the local currency, which has

risen against the U.S. dollar after recent dovish comments from the U.S. Federal

Reserve Chair Jerome Powell.

     After spending most of November at A$0.7200, the aussie has started

December at A$0.7400 cents and a significantly stronger currency would be

another argument to stall an RBA rate rise.

     The ABS is due to release National Accounts data on Wednesday, the day

after the RBA meeting, and the market is expecting quarterly growth of around

0.6% and above 3.5% for the year.

     If the weak housing market weighs on the result then the RBA's positive

2019 outlook -- which would culminate in an interest rate rise at some point --

will be undermined.

     This would put off any rise until late 2019 and beyond, if the risks in the

housing market become manifest, and may even lead to a change in the RBA stance.

That could see them on hold for longer, or even starting to mull a cut.

     For now, however, the RBA's careful approach is likely to extend the record

low interest rate of 1.5% into 2019.

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