RBA continues to ‘monitor risks’ to household balance sheets

The latest RBA Statement on Monetary Policy, which sets out the bank’s assessment of current economic conditions, underscored that housing prices have “grown briskly” over the past year, particularly in Sydney and Melbourne.

Released on Friday, the Statement explained that this steep growth could see more household spending and renovation activity than is currently anticipated, however a continuation of these trends would “raise medium-term risks”.

“The recent tightening in prudential standards and higher interest rates on some mortgage products are likely to weigh on credit growth, particularly for investors,” the bank said. “Investor activity is currently strong in Sydney and Melbourne, but history shows that sentiment can turn quickly, especially if prices start to fall.”

“A substantially weaker housing market could have broader implications, including slower growth in consumption and dwelling investment than expected. Consumer price inflation could also be lower than forecast because of weaker growth in economic activity and lower housing cost inflation.”

These comments come after Reserve Bank governor Philip Lowe shared his concerns over rising levels of household debt and the impact of increased property investment on the economy.

“In terms of resilience, my overall assessment is that the recent increase in household debt relative to our incomes has made the economy less resilient to future shocks,” Mr Lowe said at an Economics Society of Australia lunch in Brisbane last week.

“Given this assessment, the Reserve Bank has strongly supported the prudential measures undertaken by APRA. Double-digit growth in debt owed by investors at a time of weak income growth cannot be strengthening the resilience of our economy. Nor can a high concentration of interest-only loans.”

The Statement therefore underlined that the Reserve Bank board continues to “monitor risks posed to household balance sheets”, given the current context of high and rising household debt.

Inflation expected to increase gradually

As for inflation, the Bank said in its Statement that it has been expecting for some time that inflation will increase gradually over the period ahead, to be above 2 per cent.

According to recent figures from the ABS, Australian consumer prices rose by 0.5 per cent q/q in the March quarter to 2.1, which according to ANZ’s Quick Reaction is its highest rate since September 2014.

The bank now expects inflation to be between 2 and 3 per cent throughout the forecast period.

“The expected increase in underlying inflation over the next year or two is still quite gradual, because a number of forces are continuing to hold inflation down,” the bank said.

“In particular, wage growth is low. Although it seems unlikely that wage growth will slow much further, wage pressures are expected to pick up only gradually, as the effects of structural adjustment after the mining investment boom – which have weighed on wage growth – continue to wane.

“The forecast for the unemployment rate implies ongoing spare capacity in the labour market; this is likely to constrain wage outcomes in the period ahead.”

In its Quick Reaction to the Statement, ANZ said that the lack of change to the RBA’s headline forecasts is a “surprise”.

“The point estimate for the year to June 2017 looks too low, for instance. Interestingly, the bank’s forecasts for headline inflation don’t seem to line up with its commentary,” ANZ said.

However, it agreed that that wage growth is expected to pick up gradually, although noting that further slowing in wages would be unexpected.

ANZ concluded that it sees the RBA holding the cash rate at 1.5 per cent for an extended period.

Overall, the board said in its Statement that developments over the past three months have tended to be consistent with the forecasts published in its previous Statement, in which inflation and output growth were both expected to increase gradually.

“Taking account of the available information and having eased monetary policy in 2016, the board has judged that holding the stance of policy unchanged at recent meetings would be consistent with sustainable growth in the economy and achieving the medium-term inflation target.”

[Related: Debt binge has left Australians exposed to future shocks: RBA]