Australia central bank holds rates, still optimistic on economy

By Swati Pandey

SYDNEY (Reuters) - Australia's central bank kept rates at record lows on Tuesday and took an optimistic view on domestic activity ahead of data that is likely to show the economy grew more than 3 percent last quarter.

In a widely expected decision, the Reserve Bank of Australia (RBA) held its cash rate at 1.50 percent, having last eased in August 2016 as policy makers await a revival in growth and inflation.

"The Australian economy is performing well," RBA governor Philip Lowe said in a statement, while predicting a further fall in unemployment.

Yet as consumer prices remain subdued - a major reason for the RBA's steady stance in the past two years - policy makers have shown no urgency to tighten rates. Markets are not fully pricing in a rate rise until well into 2020

"Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual," Lowe said.

He repeated the outlook for household consumption was a "continuing source of uncertainty" as incomes remained weak while debt levels were high.

Some economists suspect tepid wage growth of around 2 percent and cautious consumer spending will eventually hurt the economy.

The GDP report is due on Wednesday and is forecast to show growth of 0.6 percent in the September quarter from the June quarter when the economy expanded 0.9 percent.

Annual growth was likely 3.3 percent, tracking a brisk 3.4 percent the previous quarter.

"The RBA has so far been able to play down the implications of falling house prices, with the view that stronger growth in household income would provide enough support to consumer spending," said ANZ economist Felicity Emmett.

"But with house price weakness accelerating, wages slow to pick up and consumption softening, the outlook may not be so rosy."

Australia's once-booming housing market is in a retreat, with prices falling the most since the 2008 global financial crisis last month.

Concerns of a global trade war and strains in emerging markets have also clouded prospects for world growth.

Still, Lowe expects Australia's A$1.8 trillion economy to expand at an annual 3-1/2 percent pace over this year and next, helped by solid business investment and strong public spending on infrastructure.

His optimism was supported by stronger-than-expected data from the Australian Bureau of Statistics (ABS) earlier in the day.

Figures showed government spending climbed 1.1 percent in the third quarter to an inflation-adjusted A$109.7 billion($80.7 billion)

Public spending accounts for almost a quarter of annual gross domestic product (GDP) and has been a major driver of growth over the past year or so.

Separate figures showed net exports likely added around 0.4 percentage points to GDP growth last quarter, largely led by liquefied natural gas and tourism.

That helped shrink Australia's current account deficit to A$10.7 billion, even as the country's net foreign debt ballooned to A$1.04 trillion.

($1 = 1.3598 Australian dollars)

(Reporting by Swati Pandey; Editing by Eric Meijer & Shri Navaratnam)