Reserve Bank Board members gathered today to consider the stance of monetary policy. They opted to leave the cash rate steady at 1.5%, as all surveyed economists had expected. With today’s rate decision unsurprising, the focus was on the tone of official commentary and specifically, the discussion on housing in the wake of APRA’s decision to tighten the screws on some of the more exotic forms of home loan products. APRA last week announced new rules on interest-only mortgages and reaffirmed its guidance on the 10% limit for growth in investor lending.
The Bank’s commentary today included important new sentiments around housing, as had been expected, but also more expansive thoughts on the labour market. On housing, the RBA again described house prices as rising “briskly” in some markets (while falling elsewhere), but also endorsed the regulator’s latest moves to curb “riskier” lending into housing, including interest-only loans. In fact, the Bank’s commentary today mentioned that reduced reliance on such loans would be a “positive development”.
Today’s comments on housing represent a significant step up from the Bank’s previous ‘softer approach’ merely of flagging growing financial stability risks associated with record high household debt and run-away house prices in the major east coast cities. It hints that the behind the scenes debate among officials on housing market risks has stepped up another notch, with the various regulators now all pulling firmly in the same direction.
The new comments on the labour market acknowledged the recent unexpected lift in the jobless rate, although RBA officials still expect “continued growth in employment”. Meanwhile, the economy continues its “transition” to more non-mining sources of growth, a process being helped by a lower AUD. The rise in business confidence was described alongside above-average levels of business confidence.
Outside these modifications, though, there was little change in the description of broader economic conditions here and overseas, nor the operation of financial markets, which are “functioning effectively”. The Bank’s assessment of overseas economic conditions sounded more upbeat than before, with inflation and interest rates now rising. As before, the RBA provided no explicit guidance on the likely path of interest rates from here, so economists are free to choose their own adventures on that front.
Some economists interpret the recent tightening up on certain types of home lending as providing the RBA with more scope to cut interest rates, should that become necessary to stoke faster growth in the economy and have inflation return to target. With firmer control of riskier lending into an already hot housing market, this argument goes, the RBA has more room to move to boost activity elsewhere in the economy.
We disagree. In fact, it’s more likely that the regulator’s actions betray broad-based institutional anxiety about developments in housing and their impact on financial stability. It should follow that the RBA will be less willing, not more, to add fuel to the fire via even easier policy. Indeed, we continue to believe that the next move from the RBA will be a hike, although not until the impact of the regulator’s latest action has becomes clear. This probably means any hikes will be delayed until early in 2018 at the earliest.