RBA Governor foresees further tightening of lending standards by banks: Matthew Hassan

EXPERT OBSERVER

 

As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.5% at its July policy meeting. 

 

The Governor’s decision statement was a little less positive on the global front, and acknowledged uncertainty around the rise in Australia’s short term wholesale interest rates, but retained the core view of growth averaging a bit above 3% a year and an eventual lift in inflation.

 

The closing paragraph of the statement was unchanged, retaining the key line that, “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.”

 

Commentary on the global economy was a little more mixed.

 

Last month’s assessment that “The global economy has strengthened over the past year” was replaced with “The global economic expansion is continuing” – suggesting the pace is no longer accelerating.

 

The picture is still broadly positive although uncertainties around trade policy and strains in a few emerging markets were again noted.

 

The Governor’s comments on short term interest rates were amended as expected.

 

Whereas last month the rise in Australian short term rates was ascribed to conditions in the US, this month’s statement acknowledges it is now only partly due to developments in the US with “other factors at work as well” and that “it remains to be seen the extent to which these factors persist”.

 

The statement clearly needed to comment on this issue but has done so in a way that reveals very little about the Board’s thinking.

 

If anything, the wording, position of the comment in the statement, and other comments about wider financial conditions (“Australian dollar has depreciated a little”; “the average mortgage interest rates on outstanding loans has been declining”) imply it is not overly concerned (at this stage).

 

The local data flow continues to be in line with the RBA’s growth view, the strong March quarter GDP result and continued pick up in non-mining business investment noted, as well as the strength in public infrastructure.

 

Households are again cited as a source of uncertainty.

 

The Governor’s statement was more forthright about prospects for jobs and wages growth, asserting up front that “the outlook for the labour market remains positive”.

 

That compares to the more nuanced, and seemingly tentative, discussion in the June decision statement although the observations in both are broadly the same (“forward looking indicators continue to point to solid growth in employment”; “unemployment steady at around 5½% for much of the past year”; “wages growth remains low” but “appears to have troughed”).

 

The wording around skill shortages was a little firmer ("increasing reports ... in some areas").

 

There was a notable, but secondary, shift in the language about the exchange rate with the July statement dropping the comment that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

 

This line has been included in some shape or form in every Governor’s statement since March 2016. The implication is that the Bank is less wary of a rising Australian dollar disrupting the outlook with the currency at 74c vs 80c at the start of the year.

 

Notably the comment was first introduced in the context of the economy’s wider transition through the wind down in the mining investment boom, a transition the RBA may now view as largely complete.

 

On housing the Governor’s statement notes prices are declining in both the Sydney and Melbourne markets but with national measures "little changed" over the last six months.

 

APRA’s supervisory measures are again seen as having helped contain the build-up of risk.

 

The Governor seems a little less concerned about a further tightening of lending standards by banks, which is viewed as “possible” and set against the observation that average mortgage rates on outstanding loans have declined.

 

Again, this remains a 'watch this space' issue.

Concluding, while there were again several points of interest, the July decision statement showed little substantive change.

 

The RBA still looks to be firmly on hold and prepared for a long wait.

 

The minutes should reveal more about the Board’s deliberations, the discussion of short term wholesale interest rates will be of particular interest as well as the risks around a further tightening in lending standards.

 

However, there’s unlikely to be any shift in rhetoric from the RBA any time soon.

 

We at Westpac confirm our long held view that the official cash rate will remain unchanged throughout 2018 and 2019.