REPEAT: MNI: Low CPI Boost To H'Hold Real Income Comforts RBA

Repeats Story Initially Transmitted at 08:40 GMT Aug 7/04:40 EST Aug 7

By Sophia Rodrigues

     SYDNEY (MNI) - A further downgrade to an already low inflation outlook may

appear worrisome for an inflation-targeting central bank, but the Reserve Bank

of Australia is looking at the brighter side of this through the boost it

provides to household real income.

     This is not to say the RBA isn't alert to the impact that consistently low

inflation could have on inflation expectations, and thus future inflation. But

the current outlook is helping them meet  one of the three mandates -- the

general welfare of the Australian people -- with households better off as prices

of some administered services are falling.

     Such a positive implication means the RBA can keep the cash rate on hold at

1.5% for longer, without worrying too much about inflation staying below the

lower end of target band. 

     That the outlook for the labor market remains positive is another source of

comfort for the RBA.

     --OUTLOOK DOWNGRADED

     In the cash rate statement published earlier Tuesday, the RBA flagged a

downgrade in the inflation outlook to be published in Friday's Statement on

Monetary Policy. The RBA now expects headline inflation to slow to 1.75% in Q3

from the previous expectation for a "bit above 2%", and this would also impact

the inflation outlook for the next year.

     The RBA thinks that an expected slowing in headline consumer price index

inflation in Q3 is mainly due to declines in administered prices, and it is not

a reflection of the demand and supply forces in the economy. The declines are

expected in utility prices, childcare rebates, some tertiary fees etc, with a

possibility that the government could announce further such measures. 

     While a slowing in headline inflation is not ideal, the RBA thinks it

offers a much-needed boost to household real income, which has been under

pressure due to low nominal wage growth.

     --CONFIDENT ABOUT WAGE GROWTH

     The RBA is aware that low headline inflation could become a problem if it

leads to lowering in expectations, with a main worry the impact it could have on

wage expectations and wage growth. However, the RBA is confident that wage

growth is on a rising trend.

     A small acceleration in minimum wage growth this year, and its own

interaction with businesses that have indicated that are expecting to raise pay

growth are reasons for the RBA's confidence. This comes alongside the fact that

in the first quarter GDP report, the RBA noted an acceleration in average

earnings, another wage measure.

     Such is the RBA's confidence that it expects the acceleration in wage

growth to happen even before the unemployment rate touches 5%, widely regarded

as a non-accelerating inflation rate of unemployment, though in recent years it

may have dipped below that level.

     --TRADE UNCERTAINTY

     Confidence on the labor market and wage growth doesn't mean that RBA isn't

worried about other aspects of the outlook.

     Indeed, the RBA repeated that the direction of international trade policy

in the U.S. is one uncertainty regarding the global outlook. So far, the RBA is

focusing on the impact on the U.S. and China, and together they haven't resulted

in any significant impact on Australia's growth outlook.

     But the list of uncertainties may be longer and the RBA is likely to

discuss these in detail in Friday's SOMP. Those uncertainties have the potential

to change the direction of RBA's monetary policy, particularly if they hurt the

sectors of China's growth that Australia is reliant upon. 

--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