REPEAT: MNI STATE OF PLAY: RBA To Leave Rates At Record Low

Repeats Story Initially Transmitted at 21:00 GMT Nov 1/17:00 EST Nov 1

--Cash Rate Set To Stay At 1.5%

By Lachlan Colquhoun

     SYDNEY(MNI) - Weak inflation data and a weaker currency should see the

Reserve Bank of Australia leave official interest rates unchanged at 1.5% at its

Board Meeting Nov. 6.

     The RBA's overnight cash rate has been at a record low for two years and is

unlikely to change despite falling unemployment, an improved trade balance and

GDP growth running at an annualised 3.6%.

     The RBA Board is more focussed on inflation, and data from the Australian

Bureau of Statistics this week delivered a lower-than-expected 0.4% for the

third quarter and an anaemic 1.9% year on year. This is against the RBA's target

of between 2% and 3%.

     The differential between U.S. and Australian interest rates, combined with

the impact of slower economic growth in China, has also seen the AUD trade at

the U.S. 70 cent level in recent months and contributed to a

higher-than-expected trade surplus of A$3.02 billion for September.

     Speaking at a public function in late October, RBA Deputy Governor Guy

Debelle gave some indication of the Bank's view on the overnight cash rate when

he said: "The fact that we haven't changed it for the past couple of years is

because we think it is appropriate, and we have moved closer to achieving the

objectives that we should be achieving."

     --WAGES GROWTH

     One of those key objectives is increased employment, and while the Bank

will be encouraged by a six-year low unemployment rate of 5.0% in September the

impacts on wages growth and inflation may take some time to come to fruition,

while unemployment could fall even further in the first half of 2019.

     This could create an environment in which the RBA may consider a rate

increase for the first time since it cut rates by 25 basis points to the current

1.5 percent in August 2016.

     "Recent international experience indicates that the unemployment rate could

decline further than historical experience would suggest before we see a

material increase in wages growth," Debelle said.

     --ECONOMIC CLOUDS

     While there are several clouds hovering over the Australian economy the RBA

is not overly concerned either by the falling property market and levels of

household indebtedness, or by the tighter credit environment which has resulted

from a Royal Commission into the banking sector which is set to report next

February.

     On the housing market, where house prices are down 2.7% nationally in the

last 12 months, RBA Assistant Governor Michele Bullock told a public forum in

late October that the bank had noticed the declining participation of investors

in the property market and "a switch towards owner occupiers and first home

buyers."

     This, said Bullock, "is actually a positive thing."

     On the banking sector, Bullock said the Royal Commission had only had a

small impact on the major banks and changes to their business models might

result in lower profits but would make the financial sector more resilient.

     She noted that the Tier 1 Capital ratings of the major Australian banks had

moved from around 7% at the time of the Global Financial Crisis in 2008 to 12.5%

today.

     In combination, all of this points to interest rates remaining unchanged at

next Tuesday's Board Meeting.

     As Guy Debelle said in his October speech, the RBA does not "try to

pre-empt stuff, just to have some gunpowder in the locker."

     It would seem the power is likely to remain dry, and in the locker, until

well into 2019.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com