MNI STATE OF PLAY: RBA Statement Might Strike A Positive Note

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is likely to leave the cash

rate unchanged at 1.5% again at its meeting on Tuesday but solid second quarter

growth and a strong labor market could prompt a more positive tone in its

statement.

     This could mean the market is still underpricing the risk the RBA might

raise the cash rate before the end of next year. Investors are pricing about a

40% chance of a 25bps hike by August 2019.

     --KEY MESSAGE INTACT

     The RBA is likely to retain its main message that it expects further

progress in reducing unemployment and returning inflation to target, and that

keeping monetary policy unchanged would be consistent with its mandate.

     But GDP growth in the second quarter was better than the RBA's forecast,

making officials more optimistic about future expansion.

     The RBA was also pleased with August labor market data published in

September, which was stronger all round although the jobless rate was unchanged

at 5.3%. Employment, the participation rate and full-time jobs all grew, and

underutilization fell. The RBA is already considering the prospect the

unemployment rate could fall to 5.0% earlier than it forecast in the August

Statement on Monetary Policy (SOMP), but may stop short of stating this in the

cash rate statement.

     Labor market and growth forecasts will be updated in the November SOMP and

there's a likelihood of upgrades to both.

     --GLOBAL INFLATION

     The RBA's commentary on global inflation should also be worth watching, and

may be tweaked to suggest it could accelerate. Rising oil prices might attract a

reference too.

     Commentary on global trade tensions and on China will likely remain

unchanged. Financial and economic emerging market risks might also be mentioned,

but none of these will affect the RBA's central scenario that gradual progress

in the economy should mean the next move in the cash rate is more likely to be

up, rather than down.

     --OTHERS

     Other parts of the statement should be little changed from September. The

RBA should reiterate that the average mortgage rate paid is lower than a year

ago and that conditions in Sydney and Melbourne housing markets have continued

to ease, reflecting its confidence that housing prices may not fall sharply.

     With no fresh prices data in the past month, the commentary on inflation is

likely to remain unaltered.

     The RBA might point to a household consumption rebound in the second

quarter but may also retain a reference to it as a source of uncertainty.

     The rate decision is due at 1430 hours local time.

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

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