MNI STATE OF PLAY: RBA To Cut CPI Forecasts But Cash Rate Unch

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is likely to downgrade its

inflation forecasts but will continue to cite the overall flexibility in its

inflation targeting regime as a reason to leave the cash rate unchanged for the

14th meeting in a row.

     The RBA's cash rate decision is due Tuesday at 14:30 local time (0330 GMT).

As in the middle month of every quarter, the decision will be based on updated

forecasts for the economy that will be prepared for the Statement on Monetary

Policy to be published Friday.

     The RBA's forecasts are likely to show little change for the growth outlook

but a drop in unemployment rate and a downgrade in inflation. Put together, the

RBA may characterize the forecasts as little changed and together with continued

concerns over elevated household debt, it will keep the cash rate on hold at

1.5% and also signal steady rates for longer.

     A cut in the inflation forecasts is largely due to the effect of the

re-weighting in the consumer price index expenditure basket, which is expected

to reduce Q3 inflation by around 0.25 percentage point. Looking at next four

quarters to September 2018, Westpac senior economist Justin Smirk estimates the

reweighting will cut the inflation rate by 0.35 percentage point, taking the

annual headline inflation pace to 2.0% y/y.

     Growth forecasts are likely to be maintained, with any risk expected to be

to the upside. Factors contributing to stronger growth are likely to be

increased infrastructure spending by the government, a pick-up in non-mining

business investment, a slightly more prolonged residential construction cycle,

continued employment growth and higher immigration. 

     The key offset would be the slightly lower terms of trade outlook and a

downgrade in household consumption outlook in the near term.

     Full details on the forecast will only be known on Friday when the full

policy statement is released, so it will be only the broader changes that will

be reflected in the cash rate statement Tuesday.

     The RBA will continue to highlight the outlook for consumption as a source

of uncertainty especially because there isn't likely to be any change in its

outlook that low wage growth will continue for a while.

     One possible change to look for would be in the language about the

Australian dollar. The rise in the exchange rate in the past few months was

certainly a concern for the RBA but it is unlikely to have resulted in any

material impact on the growth and inflation forecasts.

     With the exchange rate now giving back most of those gains, the RBA may

consider reverting to the language it used prior to the recent run-up in the

exchange rate: "The depreciation of the exchange rate since 2013 has also

assisted the economy in its transition following the mining investment boom. An

appreciating exchange rate would complicate this adjustment."

     The commentary on the housing market is expected to be largely maintained,

though the RBA may specifically point to further easing in housing prices in

Sydney and some moderation in housing price growth in Melbourne.

     No change is expected in the commentary on global developments, especially

given that wage growth remains low in most countries as does core inflation. But

the RBA may point to recent monetary policy decisions by the European Central

Bank and the Bank of England to start to tighten their policies.

     The last paragraph is expected to be left intact: "The low level of

interest rates is continuing to support the Australian economy. 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."

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

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