Patience defines Reserve Bank of Australia's cash rate position and outlook

The Reserve Bank is expected to reaffirm that it's still in no rush to lift the cash rate when policymakers meet on Tuesday, though investors will be keen to parse the post-meeting statement for any insight on how the central bank is interpreting the latest data on the local labour market.

After a boom year in 2017, the jobs market has begun 2018 falling just short of the near monthly 20,000 job gain needed to lower the unemployment rate, as more discouraged workers take jobs, which in turn has dented hopes for stronger wage growth.

"Labour market slack is not reducing much," NAB economist Kaixin Owyong said in a note on Thursday ahead of the Easter break. "As such, markets will look for any sign that this will prompt the RBA to rethink its already modest outlook of a gradual improvement in unemployment."

The unanimous bet is that the cash rate will be held at 1.5 per cent for a record 18th straight meeting; the rate has been steady since August 2016.

Paul Bloxham, HSBC's chief economist for Australia and New Zealand, late last week pushed back his call for a rate rise to the fourth quarter of 2018 from the third quarter because of the slower pace of labour market tightening.

"For the RBA to begin to consider lifting its cash rate, we believe the central bank will need to be convinced that wage growth is picking up fast enough that it can start to forecast that underlying inflation will return to the mid-point of the 2-3 per cent target band. The RBA's last set of forecasts, published in early February, showed that it expects underlying inflation to remain below the 2-3 per cent target band in the near term and to lift only to 2.25 per cent by mid-2020."

Dollar outlook tweak

While jobs growth has been running at 3.5 per cent year over year, which is its fastest rate since 2005, Mr Bloxham said, the unemployment rate has been steady over the past nine months because the participation rate has risen so sharply.

"We see it as unlikely that the participation rate will increase much further, given that it is near a record high, but we still expect continued strong jobs growth – when combined, this should push the unemployment rate lower. We highlight that business surveys are continuing to report that it is getting harder to find suitable labour, which is a typical precursor to wage rises."

The expectation that a rate hike will be delayed until the final three months of the year also led Mr Bloxham to tweak his forecast for the Australian dollar which he now sees reaching US80¢ in the second quarter, US82¢ in the September quarter and US84¢ in the December quarter. Previously he expected the $A to reach US81¢ in the June quarter and US84¢ in the September quarter.

At the close of trading on Thursday in New York, the Australian dollar was at US76.78¢.

"We can't see how the RBA can inject hawkish tones into April's statement compared with the one released [last month]," TD Securities said, particularly after January retail sales and fourth-quarter GDP disappointed. In addition, base metal prices have eased, as evidenced by a near 20 per cent slide in the price of iron ore, it added.

Confidence level in focus

Capital Economics' Kate Hickie is holding to her long-held dovish call on rates because inflationary pressures remain subdued.

"We expect that another year of below potential GDP growth and subdued rates of wage growth will keep underlying inflation lower for longer than the RBA expects," Ms Hickie said. "As a result, we doubt that rates will begin to rise until the second half of 2019."

However, Ms Hickie said the door to an earlier hike could be opened if Capital Economics' growth and price forecasts for Australia prove too pessimistic.

"We expect GDP growth to average 2.5 per cent this year and next. But if, for instance, dwellings investment proves to be more resilient to the slowing housing market than we expect or consumer spending holds up better in the face of weak wage growth, then GDP growth could be stronger.

"Underlying inflation may also come in stronger than we expect if there is a more rapid rise in wage growth than we currently anticipate," she also said.

The RBA also could lift sooner than Ms Hickie is forecasting, she said, if the central bank "simply becomes more confident in its belief that inflation will return to the bottom of its 2-3 per cent target in 2019 and then continue to rise towards the middle of the target thereafter, then given that monetary policy works with a lag of around 18 months this may be enough to prompt the RBA to act sooner".