REPEAT:RBA Debelle:Need Strong GDP,H'Hold Income For Rate Hike

Repeats Story Initially Transmitted at 23:50 GMT Nov 12/18:50 EST Nov 12

--Sees Solid Upward Trajectory in Non-Mining Business Investment

--Upside from Infrastructure Spending, Downside is Subdued Wage Growth

By Sophia Rodrigues

     SYDNEY (MNI) - An increase in the Reserve Bank of Australia's cash rate

requires strong growth and rising household income, and the central bank doesn't

see a scenario where an economic shock could force a rate hike when these other

main elements are missing, Deputy Governor Guy Debelle said Monday.

     Debelle made the comments following a speech at UBS Australasia Conference

in Sydney on the topic "Business Investment in Australia."

     Debelle said for cash rate to go up it is important that "economic growth

is stronger, nominal growth is stronger and household income rising."

     In the absence of these, a rate rise cannot happen, Debelle said. "I

personally don't think there will be some set of circumstances where it just

happens."

     "It will happen in the context of nominal inflation and wage increases in

economy being stronger than now," he said, emphasizing that he doesn't see a

shock which causes rates to go up when those other factors are not present. 

     In the speech, Debelle talked about the positive outlook for non-mining

business investment. In the question and answer session, he said that

stronger-than-expected infrastructure spending poses an upside risk to the

economy while subdued wage growth poses a downside risk.

     The RBA is hopeful that as businesses increase their spending and as they

hire more workers, spare capacity in the economy will slowly diminish and that

would push up wages.

     But this wage story is not yet panning out and there's a risk that it could

take a lot longer than anticipated, Debelle warned.

     In the speech, Debelle said the era of weak non-mining business investment

may be changing globally and in Australia in particular there appears to be

solid upward trajectory in such investment.

     "Of late, there have been signs of life in investment spending outside the

resources sector," Debelle said, adding, that following some data revisions "it

now appears that there has been a solid upward trajectory in non-mining business

investment over the past couple of years."

     Business investment has been supported by service sectors such as health,

information, as well as media and telecommunications. But this movement is not

being fully captured by the official Australian Bureau of Statistics capital

expenditure survey, Debelle said.

     The other area supporting non-mining business investment is infrastructure

spending, as a share of these projects are completed by the private sector on

behalf of the public sector. 

     "This has boosted investment growth, both as a direct consequence of the

infrastructure spending and, increasingly, in spillovers to other parts of the

economy," Debelle said. 

     In the mining sector, there is unlikely to be any material increase in

investment spending in the period ahead, he said. "As a result, our expectation

is that investment spending in the resources sector will bottom out just above 2

per cent of GDP and stay at roughly that level for quite a while."

     With little new supply expected in commodities like iron ore, prices will

be determined by demand dynamics. This means prices will rise again if demand

grows but will fall if demand declines, he said.

     In the near term, the prices of coal and iron ore are primarily affected by

Chinese demand, Debelle noted.

     "It is worth keeping in mind the simple point that maintaining the level of

demand around current levels will support prices if there is no material change

in supply. If demand declines then prices will fall, but, if it grows, then

prices are likely to rise again," he said.

     The RBA's assessment is that the vast bulk of the increase in iron ore

production is over, with only a project or two still to be completed. 

     But LNG is in a much earlier stage of the process. LNG exports have risen

by 75% over the past several years and the RBA's expectation is that, over the

next several years, exports are likely to increase by a further one-third. 

     "At the end of that, LNG exports are likely to be two-thirds of the value

of iron ore exports, and account for around 15 per cent of total exports from

Australia," he predicted.

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