RBA holds rates steady, more concerned about the labour market: Bill Evans

GUEST OBSERVER

As universally expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50 percent.

As we anticipated in our preview, two key changes are prominent in this month’s statement by the Governor.

Firstly, the commentary around the domestic economy is somewhat less upbeat. The growth performance is described as “ongoing moderate growth.” In particular the commentary around the labour market is downbeat. It is recognised that some indicators of conditions in the labour market have softened recently; the unemployment rate has moved a little higher and employment growth is modest. The forward looking indicators continue to be pointing to continued growth in employment although the use of the words “still point” provides some hint that the Bank is less committed to that prospect. Further, the Governor notes that “wage growth remains slow.”

Considerable attention is given to the housing market. While the theme that conditions vary markedly around the country is maintained the Governor speaks for the first time around “the risks associated with high and rising levels of indebtedness.” The minutes to the March meeting referred to “a build-up of risks associated with the housing market” and today’s statement just emphasises the Bank’s concern in this regard. In the March statement the Governor noted: “supervisory measures have contributed to some strengthening of lending standards.” In this statement he significantly raises the bar and asserts that: “lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions … [including] a reduced reliance on interest only housing loans.” This is a much more direct statement setting the scene for expected further pressure on the banks from the regulators.

As has been the case in previous statements the currency is quoted as “an appreciating exchange rate would complicate this adjustment.”

Conclusion
Since August last year we have argued consistently that rates will remain on hold over the course of 2017 and 2018. We do expect that macro prudential and banks’ self-regulatory policies will be successful in taking most of the heat out of the housing market over the course of the remainder of this year. Even though spare capacity is expected to persist in the labour market and low wage and inflation conditions remain the Bank will not opt for further policy easing given the risks of reigniting house prices.

With Australian interest rates steady and US rates continuing to rise (two Fed hikes expected this year) supplemented by a turnaround in commodity prices the stimulus required for the domestic economy is likely to come through a more competitive Australian dollar than lower interest rates. 

BILL EVANS is chief economist of Westpac.