RBA on hold and neutral bias reaffirmed: Gareth Aird
GUEST OBSERVER
The RBA’s decision to leave the cash rate unchanged today came as no surprise.
The competing forces of below target inflation and soft employment growth against rampant property markets in Sydney and Melbourne mean policy is on hold for the foreseeable future.
The most interesting feature in the Governor’s Statement today was the second last paragraph, which was new. The entire paragraph was devoted to a discussion on lending for housing. The Governor noted that growth in household borrowing to purchase dwellings, “continues to outpace growth in household income”. And that, “a reduced reliance on interest-only housing loans in the Australian market would be a positive development.”
Lowe’s comments come in the wake of APRA’s additional supervisory measures, announced last Friday, to address risks that continue to build within the mortgage lending market. The new rules will limit new interest only lending to 30% of new lending (currently ~40%) and limit the number of loans with high LVRs. At the margin, the changes should cool investor-related demand for housing, but not sufficiently so to put a rate cut back on the table.
The Governor is a little more downbeat on the labour market, noting that, “some indicators of conditions in the labour market have softened recently.” The February labour force data (published two weeks ago) showed employment contracted over the month and the unemployment rate lifted to 5.9%. As such, the March data (due 13 April) takes on added significance because another weak employment report would see the RBA’s forecasts for jobs and wages growth tested.
The rest of today’s Statement contained only cosmetic changes compared with the March Statement.
The outlook
The consistent message from the RBA over the past two months has been that rate cuts are off the table. Very strong dwelling price growth and growing concerns around the level of household debt mean that the cash rate is unlikely go lower unless there is a sustained loss of momentum in job creation.
Of course the debt burden faced by households would be lessened with lower rates. But the historical experience in Australia has shown that debt has risen as a share of income as rates have fallen. Further rates cuts at this point would simply encourage more borrowing that would ultimately go into bricks and mortar. That said, we very much doubt that the RBA would use its main policy lever to slow activity in the housing market while inflation is below target and spare capacity in the economy is elevated. It would be a very unusual move if it did, particularly given the latest round of supervisory measures announced by APRA.
The market is pricing in a non-trivial 41% change of a rate hike within the next 12 months. But we cannot make or see the case for policy to be tightened. As such, we continue to expect the RBA to be on hold over 2017 and well into 2018.
Gareth Aird is economist at Commonwealth Bank and can be contacted here.