For something many believed was simply going to be a “cut and paste” job from what was previously communicated in March, the RBA’s April monetary policy statement has certainly created some talking points.
Not only did the bank ramp up its concern over heat in Australia’s east coast property market — an outcome that may expected given recent macroprudential tightening from Australia’s banking regulator, APRA — but also towards current labour market conditions, noting that recent indicators had softened.
Along with those concerns, intertwined and potentially adding to financial risks should they be allowed to continue on their current course, the bank also appeared less confident about broader domestic economic conditions, suggesting that it points to “ongoing moderate growth”.
It’s not exactly what you would expect from a bank which only two months ago was forecasting an acceleration in GDP in the years ahead.
Combined, there has been a distinctly dovish shift from the RBA, although it wasn’t enough to see the bank adopt an implicit easing bias in the final paragraph of the statement.
Financial markets have picked up on this shift, selling down the Australian dollar and buying Australian government bond futures, indicating less likelihood that the RBA will increase rates anytime soon, or perhaps that further rate cuts cannot be ruled out.
While the markets have had their say, it’s time to see what Australia’s economic community has made of the distinct shift in language offered by the bank in February.
We start with Bill Evans, Westpac’s chief economist.
Bill Evans, Westpac
The commentary around the domestic economy is somewhat less upbeat. The growth performance is described as “ongoing moderate growth.” In particular the commentary around the labour market is downbeat. It is recognised that some indicators of conditions in the labour market have softened recently, the unemployment rate has moved a little higher, and employment growth is modest. The forward looking indicators continue to be pointing to continued growth in employment although the use of the words “still point” provides some hint that the Bank is less committed to that prospect. Further, the Governor notes that “wage growth remains slow.”
Considerable attention is given to the housing market. While the theme that conditions vary markedly around the country is maintained the Governor speaks for the first time around “the risks associated with high and rising levels of indebtedness”. In the March statement the Governor noted “supervisory measures have contributed to some strengthening of lending standards”. In this statement he significantly raises the bar and asserts that “lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions … [including] a reduced reliance on interest only housing loans”. This is a much more direct statement setting the scene for expected further pressure on the banks from the regulators.
Since August last year we have argued consistently that rates will remain on hold over the course of 2017 and 2018. We do expect that macro prudential and banks’ self-regulatory policies will be successful in taking most of the heat out of the housing market over the course of the remainder of this year. Even though spare capacity is expected to persist in the labour market and low wage and inflation conditions remain the Bank will not opt for further policy easing given the risks of reigniting house prices.
George Tharenou, UBS
Overall, the RBA remains ‘neutral’. They see an improved global backdrop and moderate domestic growth, which is now coupled by an elevated focus on household leverage.
However, the RBA has already shown a clear willingness to use further macro-prudential tightening, rather than the ‘blunt stick’ of rate hikes. Indeed, as inflation remains “quite low”, and the labour market “softened recently”, they are showing little near-term urgency to back away from a record low cash rate. Indeed, we still think Australia was late to deflation and will likely be late to reflation, helped by a range of local disinflationary forces, from heightened competition, low wages and a record housing supply.
This combined with the RBA needing some time to assess the impact of only very recent macroprudential policy tightening, means that we continue to see the RBA on hold until at least 2H-2018.
Sally Auld, JP Morgan
It can’t have been a particularly palatable set of facts facing the RBA Board when discussion turned to the domestic economy at today’s meeting. Last month’s Statement was consistent with a central bank on hold, but clearly more worried about developments in housing and household balance sheets. Since then, house prices in Sydney and Melbourne have continued to accelerate, and recent data shows further lift in already elevated household balance sheet leverage ratios. In a worrying sign, the unemployment rate is now 0.2 percentage points higher, and growth in retail sales continues to decelerate.
Today’s comment on [GDP] growth was limited to the observation that “…Recent data are consistent with ongoing moderate growth”. This would clearly come as some disappointment to policy makers, given that they revised down a number of key inputs into the GDP forecasts like consumption and employment growth in February.
With growth likely to track 2.0% to 2.5% over the next few quarters, and signs of a sustained lift in core inflation still elusive, risks remain biased towards a lower cash rate at some point. An intensification of existing macro-prudential rules will clearly give the RBA more flexibility to entertain this option, should it be required. Next week’s labour force data will be a key marker. At the moment, the RBA’s strategy is based on accepting a drawn-out return of inflation to target in order to contain financial stability risks. A further rise in the unemployment rate will start to render this strategy untenable.
Gareth Aird, CBA
The consistent message from the RBA over the past two months has been that rate cuts are off the table. Very strong dwelling price growth and growing concerns around the level of household debt mean that the cash rate is unlikely go lower unless there is a sustained loss of momentum in job creation.
Of course the debt burden faced by households would be lessened with lower rates. But the historical experience in Australia has shown that debt has risen as a share of income as rates have fallen. Further rates cuts at this point would simply encourage more borrowing that would ultimately go into bricks and mortar.
That said, we very much doubt that the RBA would use its main policy lever to slow activity in the housing market while inflation is below target and spare capacity in the economy is elevated. It would be a very unusual move if it did, particularly given the latest round of supervisory measures announced by APRA.
The market is pricing in a non trivial 41% change of a rate hike within the next 12 months. But we cannot make or see the case for policy to be tightened. As such, we continue to expect the RBA to be on hold over 2017 and well into 2018.
Ivan Colhoun, NAB
The RBA Governor has made clear in previous public pronouncements that while the Bank would like to see the unemployment rate come down more quickly and inflation return to target more quickly, the Bank has had concerns that a further cut in interest rates could induce some households to borrow beyond their means. The Bank was thus prioritising its concerns about household balance sheet and financial stability risks. The Governor has also noted that if the unemployment rate were to begin to rise, then the Bank could reassess the question about the time taken to return to the inflation target — and implicitly would be more likely to reduce interest rates.
APRA’s recent moves are designed to reinforce strong lending standards. Could that allow the Bank to further reduce interest rates? That would seem to require the Bank to again become more comfortable that these measures have reduced financial stability risks or to see a clearer trend to higher unemployment, both of which would unlikely to become clear for some months. Meanwhile, the Bank is likely to continue to hope that growth will pick-up on the back of stronger global growth and recently higher commodity prices.
Felicity Emmett, ANZ
Changes to the RBA’s statement were concentrated around the housing market commentary, highlighting the Bank’s concerns about financial stability. The measures announced by APRA last week are expected to help at the margin, but the Bank is clearly concerned about the risks from rising household debt.
The RBA noted that “recent data are consistent with ongoing moderate growth” although “some indicators of conditions in the labour market have softened recently” acknowledging that “the unemployment rate has moved a little higher and employment growth is modest”. The outlook however remains little changed with the bank repeating that “the various forward-looking indicators still point to continued growth in employment over the period ahead”.
We continue to see rates on hold at 1.5% for an extended period, with concerns around persistently low inflation offset by the strength in the housing market. The RBA will be keenly awaiting the Q1 CPI — due out on 26 April — for an update on inflation.
Annette Beacher, TD Securities
The Bank noted the recent tightening in lending standards and higher mortgage rates. We expected this given that its fellow Council of Financial Regulators members APRA and ASIC just stepped up their measures/supervision in the face of “heightened risks” from housing.
The RBA appears confident about the global backdrop, but provided an offset via reiterating its concerns about the soft underbelly of the labour market. Otherwise, the statement was a near-repeat of March, without a hawkish tilt.
To shift the RBA into a more hawkish stance we need to see no slowdown in riskier lending in the coming months and further improvement in full-time hours worked. The March employment report is released on April 13.
The APRA/ASIC announcements are likely to be too little, too late, and poorly targeted. The acceleration in house price inflation and record household debt were well entrenched before the recent pickup in interest-only lending. As we doubt these jawbone policies will curb banking practices we still look for a higher cash rate by year end.
Michael Turner, RBC Capital Markets
There have been two noteworthy domestic developments since the RBA board last met. Firstly, February’s employment report showed the unemployment rate had hit a one-year high of 5.9%. Secondly, APRA and ASIC announced that they would seek to either limit or more closely scrutinise certain parts of the mortgage market — namely interest only lending and interest only lending at high loan-to-valuation ratios.
These developments are acknowledged accordingly. Lowe notes that recent labour market data “have softened recently”, with the unemployment rate “a little higher” and employment growth “modest”. Nonetheless, Lowe seems to be leaning towards accepting these outcomes as being within the tolerable noise of the monthly labour force reports, given he notes that “forward-looking indicators still point to continued growth in household employment.”
On net the statement is consistent with the cash rate being on hold for several more months yet. The policy debate can still be framed as an improving global economy, but patchy domestic economy with slack in the labour force and limited sign that inflation will pick up much.
Yet, the recent developments acknowledged in the statement today do tie in with our arguments as to why risks to the cash rate are still to the downside: a slower housing market — be it engineered via regulators or otherwise — and sub-trend growth leaving the unemployment rate elevated.
We continue to see these risks becoming more prominent over the course of this year, and see a final 25bps cut arriving in Q4.