The RBA minutes for February 2018 were out today. They highlighted continued momentum in the global economy, with growth up in Australia’s major trading partners. This may put pressure on inflation here. Stronger growth in the world economy had contributed to higher commodity prices over 2017.
Locally, business conditions in the September quarter had been stronger than expected, while conditions in the household sector had been a little weaker. GDP growth was expected to be a little above 3 per cent over both 2018 and 2019.
Growth in consumption had been steady at a modest pace despite relatively weak growth in household disposable income. There was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected. In an environment of high household indebtedness, consumption might be particularly sensitive to adverse developments in household income or wealth.
Conditions in established housing markets had generally eased. Prices for detached houses had fallen in Sydney, especially for more expensive properties, and growth in housing prices had slowed considerably in Melbourne. In Perth and Brisbane, housing price growth had been little changed over prior months. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next couple of years. Members noted that nationwide measures of growth in advertised rents had risen, with rents no longer falling as quickly in Perth. This suggested that rent inflation in the CPI could also be expected to rise gradually over the forecast period.
The unemployment rate was expected to decline a little further over this period to 5¼ per cent, consistent with GDP growth rising to be above potential. This implied that some spare capacity in the labour market would remain over the forecast period. Even though labour market conditions had improved noticeably over 2017, wage growth had remained subdued.
The implied spread between the average outstanding lending and funding rates for Australian banks was estimated to have been stable since mid 2017. Deposit rates had declined somewhat over the course of 2017, as banks’ demand for deposit funding had eased once they had adjusted their balance sheets to comply with the net stable funding ratio (NSFR), which had come into effect at the start of 2018. Banks had also previously increased their long-term debt funding in readiness for the introduction of the NSFR. Bond issuance by Australian banks had remained strong in 2017, with bond tenors increasing further and spreads having continued to decline to the lowest level in 10 years. Issuance of residential mortgage-backed securities had also been strong in 2017 and pricing of these securities had become more favourable to issuers, although the spreads relative to benchmark yields were still above levels seen a few years earlier.
Members observed that, while standard variable interest rates for housing loans had been little changed since mid 2017, the average outstanding variable rate had declined slightly as new and refinanced loans were typically being offered at lower rates. The decline in average outstanding rates had been slightly larger for lenders other than authorised deposit-taking institutions (ADIs), although these rates were still higher on average than those offered by ADIs.
Growth in housing credit had eased over the second half of 2017, driven largely by a slowing in lending to investors. Most of the slowing in housing credit growth had been accounted for by the major banks. Members noted that housing lending by non-ADIs had continued to grow strongly, although these lenders’ share of housing lending remained small.
Financial market pricing suggested that market participants expected the cash rate to remain unchanged during 2018, but had priced in a 25 basis point increase by early 2019.
Over 2017, progress had been made in reducing the unemployment rate and bringing inflation closer to target. The low level of interest rates was continuing to play a role in achieving this outcome. Further progress on these goals was expected over the period ahead but the increase in inflation was likely to occur only gradually as the economy strengthened; the Bank’s central forecast for the Australian economy was for GDP growth to pick up to average a little above 3 per cent over the next two years and for CPI inflation to be a little above 2 per cent in 2018. Members observed that an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than forecast.
