Vesna Poljak| Australian Financial Review| 17 July 2018
The Reserve Bank of Australia has declared it will remain vigilant around high levels of household indebtedness, leading economists to conclude that the central bank needs to see convincing inflation and growth before considering raising interest rates in 2019.
The Reserve Bank conducted a special discussion of household debt at this month’s meeting, determining that “household balance sheets continued to warrant close and careful monitoring”.
The discussion was based off a paper prepared for board members, minutes of the July rates decision released on Tuesday reveal.
“High levels of household debt could affect economic outcomes,” in making indebted households more vulnerable to economic shocks, and sensitive to changes in interest rates in terms of consumption. Such households are also less likely to respond to lower interest in the intended way, the minutes read.
Last month, the Reserve Bank minutes omitted a reference to the next move in the cash rate being up, rather than down, causing some forecasters to believe governor Philip Lowe had become more dovish in his thinking.
But that reference returned to the July minutes, which state: “members continued to agree that the next move in the cash rate would more likely be an increase than a decrease”. There is “no strong case” for a near-term move.
In its policy decision of July 3, the Reserve Bank outlined how short-term funding costs had increased in Australia.
Funding cost pressures in the economy have intensified, prompting lenders outside of the big four banks to claw back some margin by increasing rates charged to borrowers.
A broad decline in deposit growth, widening the national funding gap, highlights the Australian financial system’s reliance on volatile capital markets to plug the shortfall between loans and savings.
The Reserve Bank board is unclear on how persistent these pressures will be. While funding costs for major banks had risen “a little” over 2018, they “remained low relative to history”.
Economists have revised their expectations around interest rates to the point where the median economist surveyed by The Australian Financial Review now sees the Reserve Bank hiking in the second half of 2019, pushing back their forecasts from the first half.
The Australian dollar settled at US74.27¢, advancing around 0.2 per cent in a session notable for the New Zealand dollar’s gain upon a positive inflation estimate from the Reserve Bank of New Zealand.
“In the bigger picture, they still think the economy is improving, unemployment will come down, and that’s the most likely scenario. But it’s not happening very quickly and that comes through very clearly,” said Ivan Colhoun, National Australia Bank’s chief markets economist.
“If funding pressures led to mortgage rates going up 5 or 10 basis points, would that affect the RBA’s forecasts for growth and inflation? I don’t think so. If they went up 40 basis points or half a percent, then it might. It’s all in degrees,” he said.
Taking into account trade protectionism, funding pressures and credit availability in the economy, “collectively they’re a bit of a restraint on growth at the moment,” but on their own, neither has had a big enough impact at the moment to shift the Reserve Bank’s central view, Mr Colhoun said.
HSBC’s chief economist in Australia, Paul Bloxham, determines that broad money growth in the economy has slowed sharply, to 2.5 per cent on an annual basis as of May, from 7.8 per cent per cent one year ago.
“Growth in broad money has also fallen below credit growth, with the shortfall gap the widest it has been in more than a decade,” Mr Bloxham wrote in a report issued on Tuesday.
“The slowdown in money growth has its roots in the resurrection of investment, funded through a reduction of business deposits.
“If effective rates rise, the risk is that the RBA could need to offset the effect – most likely by being on hold for even longer,” Mr Bloxham concluded.