MNI STATE OF PLAY: RBA To Maintain Further Progress Narrative

By Sophia Rodrigues

     SYDNEY (MNI) - Despite some downside risks for both inflation and growth,

the Reserve Bank of Australia is likely to maintain its glass-half full approach

and the outlook for further progress in reducing unemployment and returning

inflation to the target mid-point.

     Following the board meeting Tuesday, the RBA is expected to leave the cash

rate unchanged at 1.5% -- the level prevailing since August 2016.

     Attention will be on the one-page statement, but the RBA is likely to

disappoint many expecting an acknowledgement of growing downside risks, instead

focusing on the positives. 

     The RBA's decision and guidance will be based on the quarterly Statement on

Monetary Policy, due Friday, when the key economic forecasts will be updated.

The RBA may make small changes to the forecasts, but overall describe it as

little-changed versus May. This will allow a continuation of the narrative that

the economy is expected to make gradual progress in reducing unemployment and

inflation, and therefore the next move in the cash rate is more likely to be up.

     The latter part is, however, expected only in the minutes and the SOMP, not

Tuesday's statement.

     --GDP STRENGTH

     The RBA's commentary on inflation is likely to be on the soft side, in line

with themes in the Q2 inflation data, but may maintain the central forecast for

a gradual pick-up as the economy strengthens.

     Since the last SOMP, Q1 GDP was released in early June, coming in above the

RBA's forecast, increasing its confidence that growth is likely to be above

trend in the next couple of years. Adding to the RBA's confidence are

expectations that the public sector will continue to contribute strongly to

growth. 

     The RBA recently pointed to the consolidated budget balance for the federal

and state governments that indicated slightly smaller cash deficits over the

coming two years than previously seen.

     The RBA may slightly downgrade the forecast for non-residential building

construction but offsetting that would be upgrade in machinery and equipment

investment. 

     --JOBS GROWTH

     More so than growth, the RBA's optimism is likely to center around the

labor market, based mainly on job vacancies, sitting at an historical high. The

RBA is also placing much weight on a combination of stronger labor market

conditions and growing skills shortages leading to a pick up in wage growth over

time.

     The RBA may also sound more positive about the outlook for household

consumption based on Q2 retail sales data. However, tempering this somewhat

would be weaker motor vehicle sales in recent months.

     On the housing market, the RBA may acknowledge falling nationwide prices.

While reiterating that lending standards by banks might tighten further, the RBA

may use the opportunity to point to competition in the mortgage market that's

leading to falls in interest rates and the recent easing in local money market

rates. Overall, the RBA is unlikely to show signs of concern over weakness in

the housing market.

     Those worries may be articulated in Friday's SOMP, where the RBA has the

opportunity to discuss risks to its forecasts. The main risk being an easing in

housing price growth having a disproportionate impact on households' spending

decisions, and thus on growth.

     --GLOBAL OUTLOOK

     The other important risk is that inflation could remain low for longer,

possibly moving lower. Any move lower would mean inflation is not making

progress towards the mid-point of the target band goal, and would thus require

an easing in monetary policy. Any description of such a risk would be in the

SOMP but the RBA's central scenario would continue to be for further gradual

progress.

     Then there are global risks, mainly from rising trade tensions and its

impact on China. Again, they will find some mention in the cash rate statement

but it is unclear if the RBA would quantify risks into forecasts.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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