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

MNI (London)
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
     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:
[TOPICS: MMLRB$,M$A$$$,M$L$$$]
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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