Reserve Bank of Australia (RBA) governor Philip Lowe was in action overnight, delivering his first speech of the year to the A50 Australian Economic Forum in Sydney.
Much like the cautiously optimistic tone seen in the bank’s February monetary policy statement earlier this week, Lowe was upbeat, talking up the prospects for the Australian economy while delivering subtle hints on the need for infrastructure investment and fiscal repair to ensure its solid run of growth continues.
He also said that there would not be widespread changes to the bank’s economic forecasts in today’s quarterly statement on monetary policy, saying that for this year and next, they would show “little change from our earlier forecasts”.
“Over the next couple of years we expect GDP growth to be around the 3% mark. In both years it will be boosted by a significant pick-up in LNG production,” he said, adding that the bank expects the economy returned to “reasonable growth” in the December quarter following the shock 0.5% GDP contraction seen a quarter earlier.
He also expressed confidence that inflationary pressures would build gradually, saying that he does not expect inflation to fall further.
“Our central forecast is for underlying inflation to gradually rise over the next couple of years, and for headline inflation to increase a bit more quickly, boosted by increases in oil and tobacco prices,” he said.
Like the bank’s monetary policy statement released earlier in the week, Lowe clearly sounds like a man who is comfortable with not only the economic outlook, but also where policy settings currently sit.
There’s no sign that he intends to adjust rates any time soon, a view that’s largely been adopted by financial markets and many prominent economists.
However, keeping with the trend seen since he became governor back in September last year, he was clear on what domestic factors could see that view on interest rates change: the outlook for the housing and labour markets.
Here’s what he said on the complexity of what’s currently occurring in Australia’s more than $6 trillion housing market.
The picture varies widely across the country. Prices for houses in Sydney and Melbourne are rising strongly, but apartment prices in some cities, including Perth and Brisbane have fallen. The population is growing strongly, but there is a large number of additional dwellings to come onto the overall market this year. Growth in rents is weak, but vacancy rates in most markets are not unusually high. And investor demand looks to have strengthened in the closing months of 2016. So it is a complex picture.
One reason for trying to understand this complex picture is that the level of household debt is relatively high. Overall, households are coping reasonably well with this. But there are clearly risks. So it is a positive development that over the past couple of years, banks have tightened their lending standards in some areas. This tightening was partly prompted by the supervisory measures put in place by the prudential regulator, APRA, and the Reserve Bank and APRA continue to work closely together monitoring developments.
So Lowe, despite clear risks, feels confident that stronger supervisory measures will contain them. However, should tighter measures lead to a sharp slowdown in housing market activity, or fail to curb rapid house price growth in some of Australia’s southeastern capitals, it clearly has the potential to lead to a shift in monetary policy settings.
And, linked to financial stability risks in the housing market, Lowe also said that the RBA is paying close attention to developments in the labour market.
Here’s what he said overnight:
Employment growth slowed over 2016 and the growth that did take place was almost entirely in part-time employment. As is the case with the housing market, conditions vary across the country. Looking forward, the number of job vacancies and job ads suggest that some strengthening in employment growth might be in prospect. Our central forecast though is for the unemployment rate to remain close to its current level for some time to come.
So, based on lead indicators, Lowe feels fairly confident that employment growth may increase in the period ahead, although not by enough to make a serious dent in the unemployment rate.
If that scenario eventuates, and discounting the risk from international factors outside of the control of the RBA, it yet again suggests that the risks to interest rates in the distant future will be for hikes, not cuts.
But, this is not assured, and if labour market conditions continue to soften like they did in 2016, it will continue to place downward pressure on wages and inflation. And, given wages are the largest proportion of household income by some margin, any lift in unemployment has the potential to create problems in the housing market and financial sector.
It’s easy to see why the RBA is watching these areas given their linkages and importance to Australia’s economic outlook. It also means that upcoming housing and labour market data has now taken on increased importance, particularly as Lowe has outlined that financial stability will play a greater role in dictating monetary policy during his tenure.
What happens in the data in these particular areas will go a long way to determining whether the next move in rates will be higher, or see the RBA continue with its easing cycle that began in late 2011.
That monitoring will resume today with the release of Australian housing finance data for December, including that to investors.