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SYDNEY, Oct 18 (Reuters) - Australia's central bank is watching the health of the labour market and of household finances when deciding on future monetary policy, while coming data on consumer prices will be important for setting inflation expectations.
Reserve Bank of Australia (RBA) Governor Philip Lowe noted core inflation of 1.5 percent was well below the target band of 2 to 3 percent and looked set to remain low for some time.
"Achieving the quickest return of inflation back to 2.5 percent would be unlikely to be in the public interest if it came at the cost of a weakening of balance sheets and an unsustainable build-up of leverage in response to historically low interest rates," Lowe told an investment conference.
"Conversely, the case for moving more quickly would be strengthened in a world where the labour market was deteriorating and people were having increasing difficulty finding jobs."
It was surprisingly low inflation that led the RBA to cut interest rates in August and May, taking them to an all-time trough of 1.5 percent.
Consumer prices rose a meagre 1 percent in the year to June while core inflation hit a record low at 1.5 percent, well below the RBA's target band of 2 to 3 percent.
Figures for the third quarter are due next week and are expected to show core inflation stayed stuck around 1.5 percent.
"The experience elsewhere suggests that we do need to guard against inflation expectations falling too far, for if this were to occur it would be more difficult to achieve the inflation target," Lowe said on Tuesday.
"We will get an important update next week, with the release of the September quarter CPI."
Overall, Lowe said the Australian economy was performing "reasonably well" with a long slump in mining investment past its worst and growth set to benefit from a recent rise in prices for resource exports.
Lowe said data on the labour market had been more mixed, with unemployment drifting lower but new jobs weighted heavily to part-time work and wages growth still weak.
The evidence on the housing market was also mixed, with home prices rising briskly in some areas, but falling in others. Rental growth was already very low and a large increase in new housing supply was coming on stream.
Household credit growth was still exceeding income growth, though much of that was being used to finance new housing construction rather than consumption. (Reporting by Wayne Cole; Editing by Matthew Lewis)