The RBA has left rates on hold, but it has a few things it wants everyone to know.
The cash rate holding steady 1.5% from its April monetary policy meeting was an outcome that was widely expected by economists and financial markets alike.
Following moves from APRA and ASIC to rein in interest-only mortgage lending in recent days, it came as little surprise that the most significant changes within the accompanying monetary policy statement were on the housing market.
“Conditions in the housing market continue to vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining,” it said, echoing the view offered in March.
However, that’s were the similarities stopped.
“Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income,” it said, noting that “growth in rents is the slowest for two decades”.
That was a clear message on building financial stability risks, particularly in relation to investors who are taking on additional levels of leverage to purchase homes at a time when rental growth is so low.
Looking though the central bank speak, that sounds like the bank is concerned about speculation in the housing market.
In response to those concerns, it said that “lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions”.
It also said that a “reduced reliance on interest-only housing loans in the Australian market would also be a positive development”, noting that lenders had “recently announced increases in mortgage rates, particularly those paid by investors”.
Following the decision from Australia’s banking regulator, APRA, to do just that last Friday, limiting the proportion of interest-only loans to 30% of all new mortgage debt, it expressed confidence that the measures will help to reduce building financial stability risks.
“By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness,” it said.
Perhaps explaining the bank’s more forceful tone on developments in the housing market, the board also expressed increased concern over current job market conditions, acknowledging that they have “softened recently”.
“In particular, the unemployment rate has moved a little higher and employment growth is modest,” it said. “The various forward-looking indicators still point to continued growth in employment over the period ahead.”
Perhaps as a consequence of recent developments, it said said that “wage growth remains slow”, keeping inflationary pressures subdued.
“The rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued,” it said.
The RBA is forecasting that underlying inflation is unlikely to return to the bottom of its 2-3% target band until the middle of next year.
It’s clear that the bank’s concerns over Australia’s housing and labour markets are intertwined, understandably so given increased levels of mortgage debt need to be serviced by borrowers.
Weakening labour market conditions won’t help that, nor the broader Australian economy, particularly at a time when the economy’s transition is yet to be fully cemented.
On that transition, it said that it is “continuing” with recent data “consistent with ongoing moderate growth”. It also noted that “most measures of business confidence are at, or above, average and non-mining business investment has risen over the past year,” as was the case in March.
It also said that the improvement in the global economy had contributed to higher commodity prices “which are providing a significant boost to Australia’s national income”, again the same view communicated in March.
However, it removed the line that consumption growth had been stronger towards the end of last year, something that may have been in response to recent weak retail sales readings, including February’s report released yesterday.
On the outlook for the economy, it said that it continues to be supported by the low level of interest rates, along with prior weakness in the Australian dollar. It left its language towards the currency unchanged, saying that renewed strength would “complicate” the economy’s transition.
While the tone of the statement was definitely more dovish than what was seen in March, the board refrained from adopting a implicit easing bias in the final paragraph of the statement.
“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” it said.
A clear neutral bias, indicating that it sees no need to change official interest rates in the foreseeable future.
However, with its concerns over labour market conditions and the outlook for inflation increasing, it suggests that talk of a rate hike by the end of this seems very premature given current circumstances.
Indeed, if these concerns become even more acute, the next move in rates could still be lower, rather than higher.
One suspects that housing market conditions in the months ahead, along with developments in the labour market, will determine if such an outcome will eventuate.
The full April monetary policy statement released by RBA governor Philip Lowe can be accessed here.