REPEAT: MNI INSIGHT: RBA Sees Positive Data But Headwinds Too

Repeats Story Initially Transmitted at 06:38 GMT Oct 3/02:38 EST

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is optimistic after several

recent positive data points but every such optimism is accompanied by some

headwinds, making it difficult to upgrade view on growth and inflation.

     So, despite all the upbeat comments on recent economic data, the RBA's view

on the economy is broadly the same as in recent months. A full update on the

economy will be done next month for the quarterly Statement on Monetary Policy

but, at this point, it appears unlikely there will be any material upgrade.

     This suggests the cash rate is likely to be on hold at 1.5% for longer.

     While there has been "more consistent signs" of a pickup in non-mining

business investment, they have mostly been in line with RBA's expectation, so an

upgrade on this outlook would happen when there is more data confirming this

trend.

     Overall, the growth outlook remains supported by non-mining investment

pickup, high business conditions and large pipeline of infrastructure investment

but household spending remains a headwind. 

     To feel more positive about prospects for household spending, real wages

need to grow faster to bring down the household debt to income ratio, and

household debt growth has to slow.

     The easing in Sydney housing market conditions is a positive in that

regard, but offsetting that is continued growth in household debt even though

there's been some relief from a slowing in investor-housing credit.

     Also, easing in housing prices in a city like Sydney where prices have

increased significantly, also raises some worry about the consumption outlook.

     In the August SOMP, the RBA noted that household spending has grown by more

in New South Wales and Victoria, where housing prices continue to grow briskly

despite some tentative signs of slowing growth recently. 

     "Large unexpected rises (or falls) in housing prices could lead to changes

in the outlook for consumption growth, at least in the short term," the RBA said

in its discussion on risks to the consumption outlook.

     "Elevated debt levels are likely to amplify any risks to consumption; if

indebted households become less confident about their future prospects, they

could choose to pay down debt faster, in which case consumption growth could be

lower than forecast," the RBA said.

     Overall, the RBA remains worried about the household spending outlook even

as it is pleased with the improvement in risk profile as far as financial

stability risks go.

     The higher exchange rate remains an additional headwind, as it is weighing

on the outlook for output and employment, apart from contributing to subdued

price pressures.

     This expected headwind to inflation, apart from expectation that wage

growth will lift only slowly means the RBA doesn't think inflation outlook would

change despite a more upbeat outlook on employment.

     Until that changes, any hike in the cash rate will remain a while away.

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

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