Rates on hold through 2017 and 2018 as housing market remains robust: Bill Evans
GUEST OBSERVER
The minutes of the monetary policy meeting of the Reserve Bank Board for May provide no real changes from the April minutes.
As with April, the minutes concluded with “the Board continued to judge that developments in the labour and housing markets warranted careful monitoring”.
This comment was not included in the Governor’s statement following the May board meeting possibly suggesting that the Board had become more relaxed on these issues.
Consequently, repeating the statement in these minutes confirms the Board’s most prominent areas of interest.
The commentary on the housing market was little changed from April with conditions in the Sydney and Melbourne markets being described as “robust” (compared to April – “strengthened further”) -while prices had been falling in Perth.
The threat of additional supply, particularly from apartments, was repeated, with Brisbane being held out for particular attention.
Concerns with household leverage continued to be emphasised - “the risks associated with household balance sheets had been rising”.
Equally, the Board expects that recently announced supervisory measures will assist in this regard, although time will be needed to assess the full effects.
Data on the labour market is described as “somewhat mixed”, although forward indicators provide some comfort that “spare capacity in the labour market will decline gradually”.
Since April, the Board received an update on inflation with the release of the March quarter inflation report.
This report was described as “in line with forecasts” and consistent with, in the Board’s view, that the underlying inflation rate would pick up to around 2% by early 2018.
(Note, that still represents the bottom of the 2-3% target band and the forecasts in the May SoMP do not have inflation back in the middle of the 2-3% band until mid 2019).
The Board neatly describes the inflation dynamics around strong competitive pressures in the retail sector and soft wages growth being partly offset by higher utilities and housing construction costs, although these costs are around materials rather than wages.
The forecasts that growth will lift above 3% in the first half of 2018 is attributed to “the drag from declining mining investment waned and as resources exports continued to pick up”.
Consumption is still forecast to expand above its average rate of recent years, with risks being balanced.
It is interesting to note that these minutes include a comment “a fall in housing prices would also weigh on consumption growth” – this prospect has not been discussed in recent minutes.
The Board expects that commodity prices will continue to fall, probably moving back towards the levels of mid 2016 when the spot iron ore price was around USD$50 compared to the current USD$60.
They are also cautious about the impact of the rising terms of trade on activity particularly boosting mining investment.
There is limited confidence around the outlook for non-mining business investment with some surveys pointing to a lift in intentions and others indicating that it will be some time before we see stronger mining investment growth.
Commentary around global conditions is more positive. “The broad-based nature of the data… provided some confidence that the expansion could become self-reinforcing”.
Monetary policy clearly remains on hold as the Board assesses developments in those key markets – housing and the labour markets.
The persistent view remains that despite clear evidence that the housing construction cycle will turn down (and regulation and recent rate hikes are likely to slow housing activity and price appreciation), risks are still evident around household leverage.
On the other hand, while the Board appears to be increasingly more confident on the global outlook, there is limited optimism around the labour market; household consumption; and non-mining investment.
From our perspective, the persistent view that growth will evolve around 0.5 percent above trend in 2018 and 2019 seems overly optimistic.
While it may seem that the Bank expects to be tightening policy in 2018, our view remains that developments in the housing market; labour market; and global environment will not justify such a policy.
We remain comfortable with our view that rates will remain on hold for the remainder of 2017 and 2018.