MNI STATE OF PLAY: Risk of RBA Shift To More Hawkish Statement

--RBA Policy Seen On Hold At Tuesday Meet, Possible Wording Change 

by Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's cash rate statement on

Tuesday is likely to repeat the cautious language around household income and

high debt levels, but the overall tone may tilt further towards the hawkish

side, making current bets on a cash rate hike prospects look underpriced.

     There are unlikely to be any surprises from the rate decision this month,

with the cash rate expected to be maintained at 1.5% for the nineteenth straight

meeting. The decision is due at 1430 hours local time (0430 hours GMT).

     The money market is currently pricing just a 20% chance of a 25bps hike by

November and around 52% chance of a hike by February next year and an 84% chance

by May. Nine out of 21 economists expect a hike in November, three expect no

hike this year and next, and the remaining 9 expect a hike sometime next year.

     --FORWARD GUIDANCE

     One possible indication of a more hawkish shift could be the inclusion of

forward guidance in the cash rate statement. Earlier this month, the RBA

surprised with the inclusion of the line "it was more likely that the next move

in the cash rate would be up, rather than down" in the minutes of the April

board meeting. Governor Philip Lowe had publically stated that a few times in

the past, but it was the first occasion the RBA included it in its

communication, and it was done with the aim of improving communication.

     There is a possibility the RBA could now include the line in the cash rate

statement and while it may just be a reiteration of past view, it would still be

a signal of further hawkish shift.

     --GLOBAL, LOCAL INFLATION WATCH

     There may be some changes in the commentary around inflation though, the

degree of shift would depend on the extent of any increase in the forecast. The

forecasts will be known only when the RBA publishes the quarterly Statement on

Monetary Policy on Friday.

     There may be a slight downgrade in the growth forecast for 2018 following a

downside surprise in Q4 2017 GDP. However, any implication of lower GDP on

inflation and labor market is expected to be very limited given the downgrade

will likely be due to lower exports. 

     Thus, the overall positive commentary around growth is expected to be

maintained, as the RBA may point to increasing non-mining business investment,

elevated business conditions, and higher public infrastructure investment. 

     The main source of positive commentary would be around global growth and

inflation. Last month, the RBA pointed to an increase in core inflation in the

U.S. and Japan and expectations of a build up in the major advanced economies in

the period ahead.

     The commentary on terms of trade and the exchange rate are likely to be

unchanged. There is unlikely to be much change in the commentary on the labor

market, with the RBA expected to maintain that forward-looking indicators

continue to point to solid growth in employment in the period ahead.

     The RBA is also likely to retain the language around the housing market,

noting a fall in prices in both Sydney and Melbourne. The RBA is not expected to

be concerned by an up to 10% fall in prices, provided it is restricted to some

cities and not nationwide. 

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

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