REPEAT: MNI: RBA Debelle's Tobacco Comment Imp For CPI Outlook

Repeats Story Initially Transmitted at 03:14 GMT Aug 22/23:14 EST Aug 21

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia expects the forces

contributing to recent low rate of inflation to abate but warned that there is

uncertainty about low much longer they will persist, Deputy Governor Guy Debelle

said Wednesday.

     Debelle was speaks on the topic "Low Inflation" at the Economic Society of

Australian business lunch in Brisbane.

     Below are the key observations we made from the speech:

     --Debelle suggested the cash rate is likely to be remain on hold for longer

because the RBA would like to be more confident that inflation will be sustained

at a rate consistent with the target. He spoke in detail about the forces

contributing to low inflation in recent years and while he said the RBA expects

these forces to dissipate, he also said there is uncertainty about how much

longer they will persist.

     --Perhaps the key comment from Debelle in the speech was on tobacco prices

which he noted have been the single largest contributor to headline inflation

for some time now. In Q2, higher tobacco prices contributed 0.6 percentage

points to y/y headline inflation. The high rate of tobacco inflation reflects

the introduction of a new indexation regime in December 2013, which was to see

the tobacco excise increase by 12.5% per year above average earnings. This

regime, which was originally legislated for four years, was subsequently

extended out to 2020, Debelle said. That raises a question on what happens to

headline CPI beyond 2020 when tobacco prices no longer contribute.

     --Debelle said utility prices is a significant uncertainty for the RBA's

inflation forecast. The RBA expects utility prices to decline in the coming

quarter, he said. "The recent decline in wholesale prices and an increase in

competition amongst energy retailers has seen a decline in market offer prices

in many states. Furthermore, many energy retailers have indicated that they will

not be changing their standing offer prices in the September quarter, while

others have indicated that they will be lowering their prices," Debelle said.

     --Debelle noted that CPI inflation has average 2.5% since the inflation

target was introduced but over the past three years it has average just 1.8%. In

recent quarters around 80% of the CPI basket had an inflation rate below the

inflation-targeting average, he said.

     --Retail competition is one of the uncertainties to the RBA's inflation

forecast, Debelle said. According to him, despite margins in the retail sector

having been driven down due to foreign entrants, they still might be attractive

as there are other entrants who are only just establishing their foothold. "Our

expectation is that these forces still have some way to run," he said.

     --Rent inflation has been a considerable drag on inflation and reduced CPI

by nearly 0.2 percentage points per annum in recent years. The RBA expects the

pace of rent inflation to increase gradually over the next couple of years. The

vacancy rate has declined over the last year, and newly advertised rent growth

has increased. However, it will take some time for the flow of new rents to

materially affect the stock of rents captured in the CPI, Debelle said.

     --Debelle said the RBA expects the cost of child care will fall in the

September quarter. However, there is considerable uncertainty around what the

magnitude of this decline will be and there is also uncertainty around whether

the changes will affect measured inflation in subsequent quarters, he said. 

"For example, child care inflation has historically increased in the March

quarter since this is when families have typically reached the caps on their

benefit payments. Under the new system, many families will no longer be limited

by these caps, which means that child care prices could also fall in the March

quarter next year," he said.

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