REPEAT: MNI: RBA Forecasts Little-Changed But Risk to Upside

Repeats Story Initially Transmitted at 02:19 GMT May 4/22:19 EST May 3

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia didn't make any significant

changes to its forecasts but the overall balance of risks, and the forward

guidance suggests market may be underpricing risk of an earlier hike.

     Currently money market is pricing in around 50% chance of a 25bps hike in

the cash rate by February next year and about 92% chance by May.

     Governor Philip Lowe has been giving forward guidance in his recent

speeches and last month the RBA included it in the minutes of the April board

meeting but later omitted in the May cash rate statement.

     In the quarterly Statement on Monetary Policy published Friday, the RBA

incorporated the forward guidance but the language appears to be slightly

stronger than the ones used in recent months in the speeches and minutes.

     The RBA said it expects further progress on both inflation and unemployment

and for some time its view has been the a steady cash rate at 1.5% would assist

that progress by promoting stability and confidence.

     It then added that "If the economy continues to perform as expected, higher

interest rates are, however, likely to be appropriate at some point." At the

same time, it reiterated that it does not see a strong case for a near-term

adjustment in the cash rate.

     The inclusion of "at some point" in forward guidance suggests the RBA wants

to leave open the timing on the hike depending on how the balance of risks pan

out. 

     The main factor that would determine the timing is the possibility of banks

passing on higher funding costs by raising lending rates, and the risk of their

funding costs escalating further if global inflation rises more than expected.

In the event of this, the cash rate is likely to remain on hold for longer.

     On the other hand, if "broad-based" spare capacity in the economy reduces

earlier than expected and wage costs accelerate faster, then a rate hike would

happen sooner. Also important to the inflation outlook is how the risk from

retail deflation pans out versus the RBA's expectation. There is an additional

risk from rise in dwelling construction costs because of the competition it

faces from non-residential construction.

     An important upside risk is from the upcoming federal budget due on May 8

because it is clearly going to be expansionary and the RBA's forecasts could

change in the next quarterly policy statement in August when those details are

incorporated.

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