It took just one line from the Reserve Bank of Australia’s (RBA) 3000-words-long June meeting minutes to spell out what markets should be watching when it comes to the outlook for domestic interest rates.
Here it is:
The Board continued to judge that developments in the labour and housing markets warranted careful monitoring.
Short and simple, but there’s a reason why these markets will be of utmost importance in the period ahead.
Again, in a succinct manner, it only took the bank one paragraph to explain why markets should be paying close attention to these areas:
The Bank has responsibility for promoting financial stability within its flexible medium-term inflation targeting framework. Over recent times, with interest rates at low levels, the Board has set monetary policy to support the economy in its transition following the mining investment boom, while also paying close attention to trends in household borrowing and related financial stability considerations. Members discussed the effect of monetary policy decisions on financial stability and on future inflation, employment and output.
Basically, when considering the outlook for monetary policy, the RBA needs to balance the needs of achieving its inflation target with keeping financial stability risks contained.
And with the housing and labour markets so intertwined, at a time when household indebtedness is already high, it’s well aware that what happen in those markets carries the potential to shift the outlook for financial stability risks, employment growth, economic activity and inflation.
Given the current set of circumstances, it’s clear that the RBA aren’t prepared to lower interest rates in fear of stoking the housing market further, adopting the view that lower borrowing costs and weaker Australian dollar should gradually help to stir economic growth, employment and inflationary pressures in the years ahead.
That’s why it has an unambiguous neutral bias on interest rates, indicating that rates are unlikely to move in either direction anytime soon.
And, if it’s right in its forecasts, the next move in interest rates will be higher in the next few years.
However, that’s anything but certain. It may happen, it may not and if it’s the latter, led by unexpected weakness in housing or the labour market, it means that the prospect of rate cuts will soon be back on the table.
That’s why it’s watching these areas so closely, and why you should be too.