Australia central bank seen on hold even as tough budget looms

SYDNEY Sun May 4, 2014 9:34pm EDT

A man is reflected in the Reserve Bank of Australia (RBA) building in Central Sydney December 2, 2008. REUTERS/Daniel Munoz

A man is reflected in the Reserve Bank of Australia (RBA) building in Central Sydney December 2, 2008.

Credit: Reuters/Daniel Munoz

SYDNEY (Reuters) - Australia's central bank is almost certain to maintain a neutral policy bias this week with a batch of data likely to point to an economy that is picking up speed, uncomfortable reading for a government preparing voters for a tough federal budget.

All 25 economists polled by Reuters expect the Reserve Bank of Australia (RBA) to hold its cash rate steady at a record low 2.5 percent and reiterate its vow to keep interest rates unchanged in the months ahead.

"While recent economic indicators have been mixed and inflation was weaker than expected, we believe that the RBA's policy stance is firmly neutral and expect the central bank to leave monetary policy unchanged," Nomura analyst Martin Whetton said.

"Moreover, we think the statement will continue to suggest that the RBA is not considering any changes to its policy stance and will very likely reiterate that 'the most prudent course is likely to be a period of stability in interest rates'."

The RBA will get another chance to hammer that message home on Friday when it releases its quarterly statement on monetary policy.

Data this week including retail sales and employment should underpin the RBA's relatively sanguine outlook on the economy.

Analysts expect retail sales to rise for an eleventh straight month in March with first quarter sales up a solid 1.5 percent from the previous quarter.

Such an outcome will be a welcome boost as the A$270 billion retail sector, which accounts for 17 percent of Australia's A$1.5 trillion annual gross domestic product. It is also the second-biggest employer after the health industry, providing 10 percent of all jobs.

A strong retail number will also help underpin a labor market that is already showing promising signs of picking up after a disappointing 2013.

Analysts suspect the economy generated nearly 7,000 jobs in April, following hefty gains of 88,000 so far this year. Annual jobs growth has already sped up to 1.1 percent in March from a low point of 0.4 percent in January.

This should keep the jobless rate below 6.0 percent and a decade high of 6.1 percent hit in February and offer the hope that unemployment may have already peaked.

"Unemployment trends are important because the RBA typically doesn't shift course until the unemployment rate has peaked and starts moving down," said Commonwealth Bank chief economist Michael Blythe.

If the week unfolds as predicted, it will surely put the Australian government in an uncomfortable position as it prepares voters for a very tough Federal budget.

So far there has been little market reaction to the specter of temporary income tax hikes, raising the retirement age, and cuts to spending on social services that have been flagged in recent days.

A much-anticipated audit of the Australian economy released on Thursday recommended radical structural changes and a tight rein on costs aimed at stemming what the government warns is a looming "fiscal crisis".

Some analysts believe the actual budget due on May 13 will be much tamer, given how politically unpalatable some of the proposed measures are and given Australia's relatively favorable debt and deficit position.

"What level of fiscal drag the budget will have on the economy will be scrutinised," Nomura's Whetton said.

(Editing by Eric Meijer)

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