The Reserve Bank of Australia (RBA) released the minutes of its March monetary policy meeting earlier today, with much of the market focus centred upon the discussion surrounding the labour and housing markets.
These, along with the inflation outlook, were the areas highlighted by RBA governor Philip Lowe as being key to determining the outlook for interest rates since he took over as governor in September last year.
Much like the tone of the accompanying monetary policy statement released immediately after the meeting, the tone of the minutes was cautiously optimistic, fitting with the view of most economists and commentators that interest rates were unlikely to change any time soon.
However, as they often do, the minutes did highlight, and expand upon, potential concerns.
On this occasion, they just happened to be on the housing and labour markets, two of the three key areas previously highlighted by the governor.
On the property market, the RBA put more meat on the bones to what it said in the March policy statement that “supervisory measures had contributed to some strengthening of lending standards”, noting that “recent data continued to suggest that there had been a build-up of risks associated with the housing market”.
Elaborating on that risk further, the minutes went on to say that “borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income”.
That’s noteworthy given the RBA is now widely perceived to be giving financial stability risks a greater weighting when it comes to the outlook for monetary policy settings.
While that view, seemingly, provides yet another reason for the RBA to keep rates steady, Gareth Aird suggests that it could be interpreted as the bank calling on APRA to further place restrictions on lending to investors.
“In other words, watch this space,” he said, mirroring the remarks from APRA chairman Wayne Byres delivered to a regulatory conference in Sydney on Monday.
Mathew Hassan, senior economist at Westpac, agrees, suggesting that the bank’s language seemed “a little more urgent” that what had been previously communicated.
The prospect of increased macroprudential measures to slow investor activity has been getting increased traction recently following remarks from several leading policymakers, including from the RBA, APRA and federal treasurer Scott Morrison, that tighter lending standards could be on the way.
Related to financial stability risks, the RBA also flagged concern over the current health of the labour market, suggesting that “momentum in the labour market remained difficult to assess”.
“It was clear that spare capacity remained and there continued to be significant differences in labour market outcomes across the country,” the minutes said.
“Domestic wage pressures remained subdued and household income growth had been low, which, if it were to persist, would have implications for consumption growth and the risks posed by the level of household debt.”
Again, a clear link between the financial stability risks posed by the buildup in household debt and labour market conditions.
It also said that “spare capacity was expected to decline slowly as momentum in the economy built” with wage growth and underlying inflation “expected to rise, but only gradually”.
Given the RBA’s March meeting pre-dated the release of Australia’s February jobs report — something that was far weaker than what had been anticipated — it’s likely that the RBA would have been disappointed by the result, and could potentially see angst over the strength of labour market conditions increase.
“Another weak employment report would see the RBA’s forecasts for employment and wages growth tested,” said Aird.
Despite the uncertain outlook over the housing and labour markets, Aird says that “it would take a sustained loss of momentum in job creation or a fall in dwelling prices for Lowe to entertain the idea of taking the policy rate lower”.
“Neither outcome is in our central scenario and as such, we see the RBA on hold over 2017 and well into 2018.”
That’s a similar view to Westpac which also has interest rates on hold for all of this year and next.
“While still presenting a constructive growth view on global and local growth prospects, the minutes place more emphasis on weaknesses around labour markets and the consumer and downplay the potential upside from rising commodity prices,” says Hassan.
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