REPEAT: MNI: CPI Low But RBA Confident With Its Policy Stance

Repeats Story Initially Transmitted at 06:42 GMT Jul 25/02:42 EST Jul 25

--RBA Banking On Above-Trend GDP To Lift Wages, CPI

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia remains unfazed by the

continued trend of low inflation in the economy, as it expects above-trend

growth to lead to acceleration in wages and bring inflation to the mid-point of

the target band, MNI understands.

     Data published earlier Wednesday showed headline consumer price index

inflation rose 0.4% q/q, falling short of economists' expectations for the

seventh straight quarter. Inflation y/y, however, crept into the RBA's target

band for the first time in five quarters and only the second time in 15

quarters, with a 2.1% rise.

     Underlying CPI -- roughly taken as the average of trimmed mean and weighted

median analytical measures -- rose 1.9%, in line with expectation, although it

slowed from an upwardly revised 2.0% rise in Q1.

     While the data showed inflation pressures remained subdued, it was in line

with the RBA's own forecasts published in the May Statement on Monetary Policy.

     Significantly, the RBA acknowledges there are several soft themes in the

CPI data, but none of them are expected to change its monetary policy stance for

the next move in the cash rate to be higher.

--CONFIDENCE IN ECONOMY

     The RBA's greatest confidence comes from above-average GDP growth, which it

expects to continue despite one leading index pointing to a faltering in growth

momentum. In June, the Westpac-Melbourne's Institute leading index showed the

first below-trend reading since September and the weakest growth in the index

since last July.

     The RBA expects above-trend growth will lead to continued improvement in

the labor market, which will push the unemployment rate slowly lower, leading to

a slightly faster rate of wage growth. Already the RBA is taking comfort from

wage pressures building in some parts of the economy due to growing skills

shortages, and is hoping this will become broad-based.

     In the May policy statement, the RBA forecast above-trend GDP growth of

3.25% for the year ended December 2018, accelerating to 3.5% by June 2019 before

slowing slightly to 3.25% but remaining above-trend in December 2019.   

--SOFT TONES IN CPI DATA

     The Q2 CPI data showed downward pressure on inflation from strong retail

competition remains an ongoing theme and the RBA acknowledges that.

     The RBA has also noted that administered prices are slowing and adding to

the already soft view on inflation. The fall in market services inflation

excluding volatile items also revealed a lack of inflation pressures in the

domestic economy.

     One downside surprise for the RBA was rent inflation, which was flat q/q on

a seasonally adjusted basis compared with a 0.2% rise in Q1, marking the first

such outcome in 24 years.

     But none of this is deterring the RBA confidence that the next move in the

cash rate will be higher, though growing global risks and an increase in broader

local mortgage rate rises means current market pricing for first hike coming in

2020 may be appropriate.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com