No surprises in RBA Governor statement: Westpac's Bill Evans

EXPERT OBSERVER

The Reserve Bank Board decided to leave the cash rate at 1.50%.

The cash rate has now been on hold since August 2016.

Of course, we were not expecting any change today, but are always interested in the Governor’s Statement.

There were two issues that we thought might change in this Statement, particularly if the Governor had decided to be more upbeat in his commentary.

The first one was whether he would continue to describe the outlook for household consumption as “a continuing source of uncertainty”. This description was used in the September Statement but was dropped from the Minutes of that meeting. However, the comment has been repeated in today’s Statement. Secondly, we remain perplexed as to why the Bank can be optimistic about a lift in wages growth when it is only forecasting that the unemployment rate will fall from the current 5.3% to 5.0% by mid-2020. It was possible that, particularly following the upbeat employment report for August, the Governor may choose to indicate a lower target for the unemployment rate than the 5.0% that has been used in recent Statements. This was not the case and the 5.0% forecast has been retained. Of course, it remains a possibility that this forecast will be lowered in November with the release of the next Statement on Monetary Policy.

In terms of the actual changes in the Statement, we find two areas of interest.

Firstly, the inflation forecast for 2018 has been qualified. In September, a specific 1 ¾ per cent was nominated, whereas in today’s Statement, it is described as “one-off declines in some administered prices in the September quarter are expected to result in inflation in 2018 being a little lower than otherwise”. That probably refers to the recent lift in petrol prices which will affect the December quarter, adding upside risk to the forecast for headline inflation. No doubt, higher oil prices have been considered given the commentary around global inflation.

The second area where we have seen change has been around interest rates and credit. In September, following the out-of-cycle rate rise by one major bank, the Statement noted that the average mortgage rate paid is lower than a year ago. That strong comment is no longer used and it is merely pointed out that while lenders have increased their standard variable mortgage rates by small amounts, they have been reducing mortgage rates for some new loans.

Commentary around credit growth has changed. Whereas in September, housing credit growth was noted as declining, in this Statement, the Governor prefers to point out that “growth in credit extended to owner-occupiers remains robust”. Whilst at an annual rate of 7.4%, this is certainly true, the profile is slowing when we consider that the value of new lending to owner-occupiers (ex re-financing) is now down 5% for the year. Certainly, the new lending statistics support the second point “demand by investors has slowed noticeably”, with our estimate of the value of new lending to investors being a 27% fall (ex re-financing) for the year.

Secondly, in September, the Governor referred to “lending standards are also tighter than they were a few years ago”. This has been replaced with “credit conditions are tighter than they have been for some time”. Arguably, that is a stronger assessment of current credit conditions.

Conclusion

The final paragraph in the Governor’s Statement is identical to the Statement in September, emphasising that progress in reducing unemployment and returning inflation to the target is likely to be gradual.

While markets appear to be pricing in around a 40% probability of a rate hike by end 2019, we remain comfortable with our forecast that rates will remain on hold through 2019 and 2020.

BILL EVANS is chief economist of Westpac.