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REPEAT: MNI: Prospect Of Infla Upgrade May Seal RBA Hike Case

MNI (London)
Repeats Story Initially Transmitted at 22:32 GMT Apr 29/18:32 EST Apr 29
--RBA Committed to 2.5%, But Trajectory Important
By Sophia Rodrigues
     SYDNEY (MNI) - There is an upside risk to the Reserve Bank of Australia's
next inflation forecast and if the June 2020 forecast is revised upwards to
2.5%, with confirmation that it wasn't set to fall beyond that date, then the
case for hike in the cash rate would become clearer.
     That hike could come as early as the end of this year though there's a
greater chance that the RBA will wait until early next year.
     The RBA's updated forecasts for growth, unemployment and inflation will be
included in the quarterly Statement on Monetary Policy, due on May 4. The cash
rate decision and statement on May 1 will be based on the fresh forecasts.
     But even if the June 2020 forecast is unrevised from the 2.25% forecast in
the February policy statement, there is still the possibility of upgrade in the
inflation view which is not reflected in the forecasts, simply because they are
not likely to be extended beyond June 2020.
     This means that if the RBA's inflation trajectory shows progress to 2.5% by
say December 2020, the case for a rate hike by early next year still remains.
--INFLATION SUSTAINABILITY
     It is important to note that the RBA remains committed to the midpoint of
the 2% to 3% target band. And importantly, to consider a hike it wants to see an
inflation forecast which is not only moving towards 2.5%, but remaining around
those levels. But if the inflation path shows a progress to 2.5% then drops back
to 2.25%, a rate hike will clearly be off the table, even for early 2019.
     There is further upside risk to inflation from a likely expansionary
federal budget on May 8, with cuts in both corporate and personal income tax
rates already flagged by the Treasurer, which could result in an upgrade to
growth and inflation forecasts.
     However, with the federal budget due after the forecasts are finalized,
these likely fiscal boosts won't be reflected in the RBA's forecasts, as only
firm budget announcements, not expectations, are included. 
--UPSIDE RISKS
     Australia's Q1 consumer price index inflation data published on April 24
was in line with the RBA's expectation, so there is no downside implication to
inflation forecast from a lower starting point.
     There are though upside risks to the inflation forecast; depreciation in
the exchange rate, an upgrade in non-mining investment forecast, a small upgrade
in view on wage growth and an upgrade in view on global inflation.
     In February, the RBA's forecast for the Australian dollar was $0.78 versus
the U.S. dollar and 64.0 on a trade-weighted basis. On Friday, the AUD stood at
$0.7545 and 62.0 on TWI, so there has been a depreciation since the last policy.
     The RBA cited depreciation as an upside risk to the economy and inflation
in the February statement, as it would make domestically produced goods and
services more competitive and would directly flow through to higher domestic
inflation via higher import prices.
     Since February, the RBA has also upgraded its view on non-mining business
investment, saying in March that there are upside risks to its forecasts for
growth in non-mining business investment over the medium term.
     The RBA also believes that the rate of wage growth may have troughed. In
March, its commentary around wage growth prospects noted wages picking up in an
increasing number of industries over the prior year, and some industries with a
relatively high share of employees on individual agreements were seeing wage
growth pick up.
     On global inflation, the RBA said in April that inflationary pressures were
expected to build in the major advanced economies in the period ahead.
     These upgraded views will now be reflected in the RBA's forecasts published
in this week's policy statement.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
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