RBA STATE OF PLAY: RBA Set To Keep Guidance, May Trim Outlook

--No Early Change To 'Next Move Higher' Expected From RBA

By Lachlan Colquhoun 

     SYDNEY (MNI) - The Reserve Bank of Australia looks set to leave its forward

guidance on interest rates unchanged at its meeting Tuesday, although a key

policy statement later in the week could see its growth forecast cut.

     The RBA is expected to leave the official cash rate at a record low 1.5%,

its level since November 2016, with the focus on the accompanying commentary and

on Friday's Statement on Monetary Policy.

     The RBA has maintained that the most likely next move for interest rates

will be up, although not in the near-term -- a view confirmed by board member

Ian Harper in a recent media interview -- as it persists with a positive view of

the domestic and international economy, despite increasing volatility and

underwhelming local economic indicators.

     Friday's SOMP will likely reflect concerns that the economic slowdown in

China and the U.S./China trade standoff may be influencing the domestic outlook.

     The evolving overseas outlook, along with sluggish data at home, could see

the RBA downgrade its domestic GDP forecast from "a little above 3%" for 2019.

GDP growth fell below 3% in both Q3 and Q4 2018.

     --DOMESTIC OUTLOOK

     RBA language throughout 2018 was strongly focussed on the domestic economy,

particularly the movement in wages and prices.

     Inflation, a key trigger for raising rates, has also fallen below RBA

expectations. Its target range is between 2% and 3%, but inflation fell from an

annualised 1.9% in Q3 to a seasonally-adjusted 1.8% in Q4 2018.

     The RBA has been looking to wages growth to flow through to inflation. The

Wage Price Index rose 0.6% in the September quarter for an annualised gain of

2.3%, and December quarter data will be released later this month.

     This week, the Bank has been presented with more evidence of the rapid

cooling of the housing sector.

     Not only are house prices falling in the key Melbourne and Sydney markets,

which flows through to consumer confidence and spending, but the number of

dwelling approvals fell 8.4% between November and December 2018, and 22.5% year

on year. New apartment approvals saw an annual fall of 38%.

     --ROYAL COMMISSION

     Clouding the domestic outlook is the Royal Commission report into

Misconduct in the Financial Services Industry, which was published Monday. The

extent to which this features in RBA thinking will be revealed Wednesday, when

RBA Governor Philip Lowe addresses the National Press Club in Canberra.

     The major banks have turned off the tap for housing credit as they awaited

the Royal Commission report, and if this persists in its aftermath, a credit

squeeze could undermine spending, crimp inflation and hobble growth.

     So far, MNI has understood the RBA to be sanguine about falling house

prices, seeing evidence of a welcome departure of speculative investors, but the

danger is that the slump could impact the wider economy.

     --SLOW BURNER

     Up until now, the RBA has largely ignored analysts and media commentators

calling for a reversal of its interest rate policy and advocating a rate cut to

shore up growth.

     Any change in RBA policy is unlikely to come quickly and a shift would see

the ground prepared in advance through a change in language, which would then

flow through to the outlook.

     While not expecting any change in policy this week, the market will be

closely scrutinising the Bank's collective comments.

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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,MX$$$$]