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CPI left economists divided on rates move

AAP logoAAP 29/07/2016 Garry Shilson-Josling, Economist

Weak inflation was the focus for most economists this week - a trend confirmed by consumer price index figures on Wednesday - and the prospect that it might prompt another interest rate cut next week.

But rather than dwell on the soft inflation numbers, the hangover from a long run of weaker growth, others looked to indicators that the economy might be about to strengthen.

One of these signs came in the form of the National Australia Bank's quarterly survey of small and medium enterprises (SMEs).

"This survey provides more evidence that the positive effects of the broadening non-mining recovery are spilling over into smaller businesses," NAB's chief economist Alan Oster said.

The catch was that, so far at least, the better conditions had not spilled over into stronger jobs growth, but Mr Oster said it was encouraging conditions had improved in most industries covered by the survey.

Another glass half-full view came from the Australian economics team at UBS - George Tharenou, Scott Haslem and Jim Xu.

They took heart from the quarterly Investment Monitor produced by Deloitte Access Economics (DAE).

It showed private sector investment - both mining and non-mining - were both weakening, but flagged a jump in investment by the public sector.

And the UBS team zeroed in on that glimmer of hope.

Overall, the trend in public sector spending has picked up to a pace that will add about 0.75 percentage points to annual growth in gross domestic product, the biggest boost from the public sector since the tail-end of the GFC stimulus.

"Overall, the DAE data adds to our view that a much faster pace of public spending could provide a significant medium-term buffer against any future drag from a peaking housing market," they said.

As for the inflation figures, which confirmed inflation is firmly lodged below the RBA's two to three per cent target, not all economists interpreted them as a rate-cut trigger.

St George Bank's Jo Horton and Janu Chan said the figures kept the door open for another cut this year.

But they pointed out that, unlike the unexpectedly soft March quarter inflation figures released in late April, the latest round of data just confirmed the RBA's updated forecasts published in May.

"(Considering) today's data, taken with economic growth at close to trend and further signs of non-mining activity improving, we think that the RBA will leave interest rates unchanged when it meets next week," they said.

But Westpac's Bill Evans, while acknowledging that the RBA's decision on Tuesday would be a close call, took the alternative view.

"In my experience when conditions are this close the better approach is to forecast what you see to be the best policy and that is another cut," he said.

Although he said the inflation figures showed downward pressure on housing-related costs - a big chunk of the consumer price index - had eased , there was ample evidence of a squeeze on both business margins and labour costs.

"Wages data continues to slow, indicating that there is no sign of an abatement in wage weakness," Mr Evans said.

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