Employment and housing "warrant careful monitoring"- rate changes still very unlikely

Employment and housing
Employment and housing "warrant careful monitoring"- rate changes still very unlikely

The minutes of the Monetary Policy meeting of the Reserve Bank Board on April 4 contained some significant changes from the previous minutes for the March meeting.

Of most importance has been the final sentence in the section Considerations for Monetary Policy – “the Board judged that developments in the labour and housing markets warranted careful monitoring over coming months”.

We previously noted that the discussion of the Governor’s statement immediately following that April board meeting on the labour market had become more down beat and the housing market commentary, more concerned, emphasising “risks associated with high and rising levels of indebtedness”.

The minutes provide more detailed commentary on these issues. The Board has been concerned that soft conditions in the labour market prevail.

It has also been surprised that indications from forward looking indicators of labour demand, which were quite positive, have not led to an improvement in current labour market conditions.

Of course, this meeting preceded the announcement that full-time jobs in March had jumped by 74,500 while total employment had increased by 60,900.

Annual employment growth jumped to 1.2%, although the unemployment rate remained at 5.9%.

This encouraging result partly confirms the signals from the forward looking indicators, although the Board will remain cautious given the volatility in the monthly series.

The subsidiary  concern around weak employment growth is the feedback to household consumption which has been “a little weaker than expected”

I do not expect that the Board would regret the decision to highlight the importance of the labour market in these minutes based on this one result.

But the March employment report should certainly provide some evidence that any policy response around the labour market is not imminent.

While a policy response around labour market concerns would involve an interest rate cut, the policy response around housing markets is more likely entail further direct controls.

The minutes note that “developments needed to be kept under review and depending on how the system responds to the various measures, members noted that the Council of Financial Regulators would consider further measures if needed”.

A further policy response around the housing market cannot be discounted. 

Consistent with heightened concerns around the labour market, the Board decided to drop its confident prediction from the March Minutes, “Looking forward, year-ended growth was expected to pick up gradually to be above its potential rate over the forecast period”.

The April minutes merely refer to the economy continuing to grow moderately.

The link between soft income growth and the housing market appears prominently in the minutes.

Even though household credit growth has moderated slightly, soft income growth has led to an increase in household debt ratios and “risks associated with the housing market and household balance sheets had been rising”.

Two issues that stand out in the bank’s Financial Stability Review are firstly that the proportion of borrowers with no buffer on their repayments has risen to around a third.

Secondly, a common theme for many years of the Bank has been that the build-up in household debt is largely concentrated amongst high income/wealth borrowers.

That theme may now be less certain.

The data on which the bank relies to form that conclusion comes from a survey in 2014, which noted that only 12% of the loans by value of highly indebted borrowers is attributed to those borrowers in the bottom 40% of the wealth/income stratum.

With household debt ratios rising since 2014, concerns that more debt is transitioning to lower income/wealth cannot be dismissed.

Conclusion

The decision by the Board to specifically highlight labour market and housing market is significant.

However, it does not change our view that rates are set to remain on hold over the course of 2017 and 2018.

We expect that further upside on employment growth is likely, and while consumer spending growth will remain around trend, the case to cut rates is not strong.

On the other hand, the evidence from the second half of 2015, when a tightening of regulations contributed to a sharp slowdown in house price inflation points to the likelihood that any official concerns with rising household debt will be dealt with through the regulatory channels.

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