The RBA is concerned about banks being reluctant to lend

  • The RBA kept its cash rate unchanged at 1.5% in December, as expected.
  • It flagged greater concern about some banks “having a reduced appetite to lend” for housing purposes.
  • The bank also acknowledged there are “some signs of a slowdown in global trade, partly stemming from ongoing trade tensions”.
  • The RBA will next meet in February 2019. Incoming domestic data on housing, household spending and labour market conditions will be watched closely over the summer months.

The Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.5% in December, extending the period of policy stability that’s been in place since August 2016.

Providing no indication that will rates will change anytime soon, the key final paragraph of the statement was identical to that offered a month earlier, repeating 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”.

That suggests that while the RBA expects a “gradual” increase in inflationary pressures in the years ahead, it does not want to tighten policy preemptively, creating the potential for this progress to stall or even reverse.

Adding to the need for policy stability at this point, Lowe expressed deeper concern about tighter home loan lending standards, mirroring commentary he offered in a speech delivered in November.

“Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend,” he said.

“The demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualised pace of 5–6%.”

Previously, Lowe described credit growth to owner-occupiers as “robust”.

However, despite an acceleration in property price falls in Sydney and Melbourne last month, Lowe did not suggest any concern, simply repeating that “conditions in the Sydney and Melbourne housing markets have continued to ease”.

He also expressed little concern about the potential for a the credit slowdown to turn into an outright credit crunch, acknowledging that “mortgage rates remain low, with competition strongest for borrowers of high credit quality”.

Outside of the housing market, Lowe’s comments on the broader Australian economy remained upbeat.

“The Australian economy is performing well,” Lowe said, referring to robust business conditions, an expected increase in non-mining investment and strong growth in public infrastructure spending and exports.

Lowe reaffirmed that GDP growth was likely to average around 3.5% this year and next.

However, he repeated that “one continuing source of uncertainty is the outlook for household consumption”, the largest part of the Australian economy.

“Growth in household income remains low, debt levels are high and some asset prices have declined,” he said.

Helping to keep concerns about the household sector contained in the short to medium-term, Lowe expressed continued confidence about the outlook for labour market conditions, describing them as “positive”.

“With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely,” he said.

While some may disagree that it reflected stronger economic growth, but rather large increases to Australia’s minimum rate, Lowe also welcomed a recent pickup in wage growth to fresh multi-year highs.

“The stronger labour market has led to some pick-up in wages growth, which is a welcome development,” he said.

“The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.”

His remarks on the inflation outlook were also largely unchanged, partially reflecting a lack of new information since the board last met.

“The central scenario is for inflation to be 2.25% in 2019 and a bit higher in the following year,” Lowe said.

Reflecting a recent rebound in the Australian dollar, Lowe dropped the reference to it being in the lower part of the range it has been in over the past two years.

While much of the commentary on the domestic economy was either unchanged or simply tweaked to account for recent information, the RBA did make a fairly significant change in regards to its assessment of the global economy.

“The global economic expansion is continuing and unemployment rates in most advanced economies are low,” Lowe said.

“There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions.”

That last line was a new addition to the statement, and suggests the RBA now believes that trade tensions are having an impact on economic activity.

Fitting with that view, Lowe dropped the reference to “a number of advanced economies are growing at an above-trend rate”.

Despite risks from a significant fall in crude oil prices, something that may weigh on headline inflation in the months ahead, Lowe kept his assessment on the outlook for underlying inflationary pressures unchanged.

“A further pick-up in core inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus,” he said.

On recent movements in financial markets, Lowe said that “equity prices have declined and credit spreads have moved a little higher”, differing from the view a month ago when “yields on government bonds in some economies have increased”.

The next RBA monetary policy meeting will be held in early February next year, providing extra time for the board to monitor whether the economy is likely to perform as it expects in the first half of 2019.

From a domestic perspective, the RBA, like financial markets, will be keeping a close eye on incoming domestic data on housing, household spending and labour market conditions in particular.

The full December monetary policy statement can be accessed here.