The RBA suddenly seems more concerned about what’s happening in Sydney and Melbourne’s housing markets

  • The RBA is keeping a close eye on credit growth and availability following a period of tightening lending standards. It says lending standards could become even tighter depending upon the outcome of Australia’s Banking Royal Commission.
  • The bank sounds more concerned about Sydney and Melbourne’s housing markets, noting that “prices had declined noticeably”.
  • It still believes the next move in official interest rates is likely to be higher, albeit with caveats attached to that call.

The Reserve Bank of Australia (RBA) is monitoring the threat posed by tighter lending standards on the Australian economy, acknowledging they could become even more stringent following the conclusion of Australia’s Banking Royal Commission.

“Members observed that while the regulators had already overseen a tightening of lending standards, and a degree of tightening of lending standards had been implemented by banks in anticipation of the Commission’s findings, it was possible that banks could tighten lending conditions further given the issues raised in the report,” it said in the minutes of its October monetary policy meeting.

“Members noted that it would be important to monitor the future supply of credit to ensure that economic activity continued to be appropriately supported.”

Given that credit availability helps to grease the wheels of economic activity, the RBA is clearly not entirely confident that a more significant slowdown in credit growth may ensue in the period ahead.

The most noticeable impact from tightening lending standards for most Australians has been seen in the housing market, helping to slow, then reverse, strong price gains seen in prior years, particularly in Sydney and Melbourne.

That was not lost on Board members in October with the minutes noting that “housing prices had declined noticeably in Sydney and Melbourne”, an amplification of the view expressed a month earlier when it simply acknowledged that “price declines had followed significant growth over preceding years”.

It also added that “price declines had become more widespread in both cities” in recent months.

That suggests increased concern among policymakers about recent weakness in Australia’s largest housing markets, perhaps reflecting an acceleration in price declines reported by CoreLogic in September, along with continued declines in auction clearance rates in both cities.

Coupled with ongoing weakness in household incomes growth, the RBA expressed continued uncertainty as to whether the surge in household spending in the June quarter of this year would be sustained in the period ahead.

“Household consumption growth had picked up in the June quarter and had remained elevated over the preceding year in the face of the weak income growth reported in the national accounts,” the minutes said.

“Members observed that uncertainty about how consumption would respond if there were an extended period of low income growth, and/or declining housing prices, remained an important consideration for the forecasts.”

It acknowledged that “retail sales values had been flat in July” with liaison with retailers pointing to “below-average growth in nominal retail spending”.

In August, nominal retail sales grew by 0.3%, according to data released from the ABS.

Adding to uncertainty, the RBA said that despite strong employment growth and a tightening of labour market conditions, average earnings growth for workers remained “weak”.

“Despite ongoing improvements in labour market conditions, the national accounts measure of average earnings growth had been weak in the June quarter and had increased by only 2% over the year to the June quarter,” the minutes read.

“Other components of household income, including government transfers, had also recorded below-average growth in the recent period.”

It stuck with the view that wages growth was likely to “increase gradually as spare capacity in the labour market is absorbed”, albeit with a caveat attached.

“Recorded household income growth had been subdued and this continued to be an important source of uncertainty for the outlook for consumption and inflation,” it said.

So the RBA thinks tighter labour market conditions will help to gradually lift wage pressures, support consumption and boost inflationary pressures, but it’s not a view set in stone.

As such, it indicated that while the next move in official interest rates was still likely to be up, it remains content to maintain the status quo for the foreseeable future.

“Members assessed that the current stance of monetary policy would continue to support economic growth and allow for further progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target,” the minutes said.

“In these circumstances, members continued to agree that the next move in the cash rate was more likely to be an increase than a decrease.

“However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy.

“Rather, members assessed that it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while this progress unfolds.”

If it wasn’t apparent already, until the bank is confident enough that it will be able to achieve its inflation mandate, official rates will remain on hold.

The wildcard is whether the labour market will continue to tighten, especially at a time when falling home prices pose a downside risk to household consumption and with it the broader economy, at least from a domestic perspective.

Abroad, the RBA noted that “developments in trade policies continued to pose significant risks” to the view that global growth will “remain solid over the following couple of years”.