MNI STATE OF PLAY: RBA Growth Optimism But Infla Forecasts Cut

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia left its growth forecasts for

the economy largely unchanged amidst an improvement in the global growth outlook

and lowered its inflation forecasts, but its overall commentary suggests it will

likely leave the cash rate on hold for longer.

     There were no real surprises in the one-page statement and the decision to

leave the cash rate on hold for the 14th month in a row was expected by both

economists and the market.

     The outlook for policy is also unchanged, with the RBA repeating the

commentary that "the low level of interest rates is continuing to support the

Australian economy" and "taking account of the available information, the board

judged that holding the stance of monetary policy unchanged at this meeting

would be consistent with sustainable growth in the economy and achieving the

inflation target over time."

     A downgrade in the RBA's inflation forecasts was widely expected after the

Australian Bureau of Statistics issued updated weights on the basket of items

used to compute the consumer price index. The changes are expected to lower

inflation by up to 0.35 percentage point in the next year.

     The RBA didn't specify what the new inflation forecasts are but its

comments suggest underlying inflation is likely to remain below its 2%-to-3%

target band at least until December 2018, and perhaps longer. The forecasts, to

be published on Friday in the RBA's quarterly Statement on Monetary Policy, will

show numbers rounded to quarter percentage points, rather than in ranges,

exposing it to greater risk of revealing a figure below the target band.

     The RBA said its growth forecasts are largely unchanged, with the central

forecast for GDP to average around 3% over the next few years. The commentary on

the outlook showed more optimism on non-mining business investment and the

support to growth from increased public infrastructure investment.

     The main source of uncertainty is the outlook for household consumption,

the RBA said, adding, that household incomes are growing slowly and debt levels

remain high.

     The RBA upgraded its view on the global economy, saying "further

above-trend" growth is expected in a number of advanced economy, even though

uncertainties remain.

     There was no change in the outlook for Australia's terms of trade, which is

expected to decline in the period ahead, though finer details will only be known

in the full policy statement on Friday.

     Despite the recent fall in the exchange rate, the RBA leave its comments on

the Australian dollar unchanged, probably to keep a lid on any appreciation. "An

appreciating exchange rate would be expected to result in a slower pick-up in

economic activity and inflation than currently forecast," the RBA repeated.

     There was no change in the outlook for the labor market, with the RBA

repeating employment continues to grow strongly, with increase in all states and

a rise in labor force participation. It maintained that the jobless rate is

expected to decline gradually from its current 5.5% level.

     The commentary on the housing market signaled a slight easing in concerns,

with the RBA noting that credit standards have been tightened in a way that has

reduced the risk profile of borrowers.

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

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