MNI INSIGHT: RBA Eyes 'Wealth Effect' From House Prices Gains

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia, while still ready to cut rates

again if necessary, is increasingly confident rising house prices will drive

greater property market turnover in 2020, prompting a pickup in consumer demand

in sectors such as household furnishings and white goods, MNI understands.

     A resurgent housing market has been the clearest sign yet that 2019's rate

cuts are having some impact, and the RBA believes the wealth effect will boost

real estate listings, leading to increased turnover in the sale of established

dwellings next year. This in turn may power consumption, driving wages and

inflation higher.

     The RBA cut the official cash rate three times over 2019, to a record low

0.75%, and market expectations for a further cut in February 2020 fell slightly

last week after better-than-expected labour market data, which showed a surprise

fall in unemployment to 5.2% -- albeit driven by a large rise in part-time work

which could be seasonal and reversed after the Christmas holidays.

     Despite sluggish wage growth, the Bank continues to articulate its view of

a "gentle turning point" in the domestic economy, pointing to small increases in

GDP growth compared with the last half of 2018. Mining investment may also have

bottomed out and could begin to rise, if only incrementally, in 2020.

     --CONSUMER KEY

     The key for the RBA, however, would be a boost to consumer spending which

would help tighten the labour market, push wages higher and flow through to

inflation.

     So far, the indications are that households are either saving extra funds

from lower rates and tax cuts, or using them to pay down debt, but the RBA

believes that this may change in 2020.

     The RBA's next policy meeting is in February, by which time it will have

seen fresh data on the labour market, Christmas retail sales, inflation and new

building approvals.

     Although prepared to be patient, the RBA will still want to see more signs

of a positive pickup in the economy. In November, the Bank saw the case for

another interest rate cut but decided against the move because of a perception

it could negatively impact confidence, even though, if the timing had been

different, a cut could have been positive for sentiment.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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