The New Zealand Reserve Bank said today that the Official Cash Rate (OCR) remains at 1.75 percent. They expect to keep the OCR at this level through 2019 and 2020. The direction of the next OCR move could be up or down.
Employment is near its
maximum sustainable level. However, core consumer price inflation remains below
our 2 percent target mid-point, necessitating continued supportive monetary
policy.
Trading-partner growth
is expected to further moderate in 2019 and global commodity prices have
already softened, reducing the tailwind that New Zealand economic activity has
benefited from. The risk of a sharper downturn in trading-partner growth has also
heightened over recent months.
Despite the weaker global impetus, they expect low interest rates and government spending to support a pick-up in New Zealand’s GDP growth over 2019. Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure and housing also supports domestic demand.
As capacity pressures
build, consumer price inflation is expected to rise to around the mid-point of
our target range at 2 percent.
There are upside and
downside risks to this outlook. A more pronounced global downturn could weigh
on domestic demand, but inflation could rise faster if firms pass on cost
increases to prices to a greater extent.
They will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.
The ABS has released the first in its new combined series of household and business finance – “ 5601.0 – Lending to households and businesses, Australia, Dec 2018″.
The new data required a rebuild of our analytics, but it is very clear that the rate of growth of new credit continues to ease across the board. The focus of the release is credit flows, the rate of new loans being written. The RBA of course reports the stock at the economy level, and APRA the Bank (ADI) stock. Today we look at the flow data.
Owner Occupied lending flows fell by 1.59% from November to December, down $310 million dollars. Investment lending fell 1.6%, down $125 million dollars and personal credit fell 1.17%, down $68 million dollars. Total credit flows to households fell 1.52% down $506 million dollars. Business credit flows fell 2.55%, down $866 million dollars and total credit flows dropped 2.03% by $1.38 billion dollars, to $66.5 billion dollars.
The share of investment loan flows for residential property was 28.5% of housing flows, and lending for business fell to 50.6% of all credit flows.
The credit impulse (the rate of change of credit growth) continues to ease, which signals a weaker economy, and lower home prices ahead. Significantly, owner occupied lending is slowing faster than investor lending now.
Within the housing categories the rolling 12 month growth rates in credit flows shows that owner occupied construction are down 16.7%, finance for new builds is down 14,2%, finance for established property is down 14.3% and refinanced loans is down 10.9% over 12 months. New investment loan flows fell 3.4% and refinanced investor loans was down 21.3%, which is a significant drop. These are the factors which feed into my overall home price models, and this downward momentum of the credit impulse is highly significant, and why I am looking for more home price falls ahead. Note again, its the owner occupied sector on the slide, not just property investors!
We can look at credit flows for investor purposes across the states. NSW is down more than 25%, VIC down 21.5%, SA down 14%, WA down 12% TAS down 24%, NT down 4.7% and ACT down a massive 37%; all over the past 12 months.
First time buyers continue at a lower rate as our tracker shows, with 17.7% of new loans for first time buyers, down from 18.3% last month, a drop of 1,976 transactions compared with last month, to 8,517.
In addition the number of first time property investor buyers dropped again.
The average loan size for a first time buyer fell to $337,260, indicating tighter lending standards, while other loans were bigger at $397,404.
Finally, personal credit flows were down again, with new revolving loans especially hard hit.
The Credit Tide Is Receding
In conclusion, there is nothing in this data to suggest increased momentum in credit, but then this is in December, and before the APRA statement that lending standards will remain tight (7% hurdle rate applies) and the Royal Commission left responsible lending rules where they were.
My conclusion is that the credit impulse will continue to slow. This will have a flow on effect to home prices and household consumption. The decade of credit driven expansion looks to be over for now. The problem is of course this will lead to weaker economic out-turns ahead, and falling home prices.
That said, credit is still growing unsustainably faster than income or inflation with housing credit at 4.9% growth over 12 month. But the rate of growth, as we showed here is easing back.
And I do not think the credit tap will be opened up “to 11” again anytime soon. Welcome to a new, but uncomfortable normal. One in which those with loans they should never have had in the first place continue to struggle with them, and new borrowers, should they chose to borrow, will need to jump through a whole series of higher hoops.
20-30% peak to trough falls in home prices anyone?
Yesterday Bendigo and Adelaide Bank released their results for the half year to December 2018. The after tax statutory profit was $203.2 million up 0.2% on the prior half, but significantly lower than the $231.7 million in 1H18. The cash earnings was flat at $219.8 million, but again lower than $225.3 million in 1H18. The earnings per share was 45.1 cents, down 0.2 cents and the fully franked dividend was 35 cents per share. The return on equity fell 19 basis point half on half.
They are positioning as “Australia’s fifth largest retail bank” and they saw a rise of 18% in new customers joining and according to research are the 9th most trusted brand in Australia. Have no doubt the franchise and “local” approach is attractive to some customers, but the question is, can the current formula work in the current tight margin, highly competitive market at a time when home loan momentum is falling. One signal is cost to income, which is rising – a reflection of the high touch model.
Mortgage book growth was 2.7%, compared with system growth of 3.3% with a portfolio of $23.1 billion. They saw more growth in investor loans than owner occupied loans.
Earnings were support by other income (card activity and commissions on managed funds plus FX transactions), but net interest income was flat and Homesafe reflects changes to its accounting treatment.
Net interest margin was down 2 basis points reflecting discounting for new loans, higher funding costs and deposit repricing.
The exit margin was 2.34% and will remain under pressure ahead.
Homesafe contribution was subject to a review of their portfolio valuation methodology, as a result they removed the overlay and revised down valuation growth rates to 0% in year 1, 3% year 2 and 4% year 3 and beyond. The result was a $1.9m change to the valuation. Essentially, they tweaked the property valuations lower (from 6% growth) but then changed the discount rate to mask the effect. A little sneaky! We said last year their home price projections were heroic… but there is still more downside risk here in our view.
Their costs were higher, up 30 basis points to a cost income ratio of 57.3%, including higher staff costs, technology and legal and compliance.
Along with the other banks, they continue to adjust their provisions to AASB9 which has lifted the collective provisions. It stands at 8 basis points, below the long term average.
Arrears appears well contained at the moment. There was a small spike in 90 days plus credit card arrears, and business loans. Note though these figures EXCLUDE impaired loans over 90 days.
Capital position is 8.76% CET1, up 14 basis points. They are still working on advanced APRA accreditation (though the benefit looks increasing questionable in my view given APRA’s moves to lift the advanced ratios, relative to standard approaches.
Funding from deposits increased to 82.4% but they noted that higher BBSW impacted the cost of wholesale and securitisation funding.
So to conclude, we wonder about ongoing margin compression and the slowing housing sector and mortgage growth. Their cost base appears to contain significant fixed elements, which means they may have ongoing cost ratio issues. The benefit of advanced capital accreditation may be lower as APRA turns the screws. A tricky time for a player which gets the consumer, but has difficulty in competing in the current environment.
This is starting to look serious as the latest DFA household financial confidence index results for January 2019 reveals a further decline in levels of confidence.
The index fell to 87 in January, down from 87.3 in December, the lowest its been since the survey commenced, well below the neutral setting of 100.
By way of background, these results are derived from our household
surveys, averaged across Australia. We have 52,000 households in our
sample at any one time. We include detailed questions covering various
aspects of a household’s financial footprint. The index measures how
households are feeling about their financial health. To calculate the
index we ask questions which cover a number of different dimensions. We
start by asking households how confident they are feeling about their
job security, whether their real income has risen or fallen in the past
year, their view on their costs of living over the same period, whether
they have increased their loans and other outstanding debts including
credit cards and whether they are saving more than last year. Finally we
ask about their overall change in net worth over the past 12 months –
by net worth we mean net assets less outstanding debts.
Looking at the results by property segments, we see a fall in confidence among property investors, as home prices and rental yields continue to fall, and reflecting concerns about potential changes to negative gearing and capital gains ahead. That said, purchase interest has risen a little. We will discuss this later.
Owner occupied borrowers are also feeling the heat, reflecting some mortgage price pain, as well as the basic affordability issues. Those renting however are a little more positive relatively speaking, thanks to rents being lower now and a greater choice of property for rent being available, especially in Sydney. Overall investors are the least confident now, a considerable switch from a year or so ago!
Cutting the data by states, we see that the bunching continues as property price falls in Sydney and Melbourne erode confidence there, relative to the other states. The most significant fall was in NSW, as home prices fall – and the fall out from Opal Tower had an impact more broadly on new purchases, and off the plan commitments.
Across the age ranges we continue to see weakness, with younger households more exposed, although those older households with share market investments saw a rebound in January, which boosted their confidence a little.
Turning to our wealth segments, we continue to see property owners without a mortgage the most confidence, though falling close to the long term neutral benchmark, while those with mortgages (either investor or owner occupied) continue to decline. Renters remain the least confident. This could become an important indicator in the run up to the next election, in that even those heartland voters supporting the incumbent Government are less positive than usual.
We can then examine the moving parts within the index. We start with job confidence. Those feeling more secure about their job prospects fell 2.19% to 10.57%, while those feeling less confident rose 4.84% to 33.85%. 51.68% saw no change, but that fell by 3.30%. There was a noticeable rise of concerns in the construction sector as building approval momentum falls.
Savings rates continue to fall for many, and others are raiding what savings they have to maintain their lifestyles – something which of course cannot continue indefinably – one reason why the savings ratio continues to fall. June 1.98% of households were more comfortable than a year ago, down 1.28%, while 48.96% were less comfortable, a rise of 2.52%. 46.24% were about the same, down 1.56%.
Turning to debt, 1.11% of households are more comfortable than a year ago, and 52% are about the same. 46% are less comfortable than a year back, thanks to rising rates, switches to interest and principal from interest only loans and problems in servicing the repayments. We also continue to see growth in quasi credit such as Afterpay, as well as other forms of short term credit. Household debt of course continues to rise faster than incomes or inflation.
Income growth remains a real concern for many households (in real terms many have seen falls in recent years). 3.88% of households reported their real incomes had grown in the past year, 51.99% said incomes had fallen in real terms, and 42.5% said there had been no change. We continue to observe pressure on the income side of household balance sheets, despite the RBA’s expectation that wages will rise eventually. One bright spot was dividend payments which were higher, but this failed to offset the total picture.
One of the killer categories is the costs of living. Once again we think the CPI figures just do not reflect the lived experience of many households. 87.75% said their costs had risen over the past year, up 3.2%. This includes the old favorites, electricity, child care, health care, and household staples, despite a fall in costs of fuel at the bowser.
And finally, household net worth continues to take a dive thanks for falling home prices – this despite recent positive share price moves. Overall 32.18% of households sand their net worth had improved, down 1.82% from last month, 37.28% said their net worth had fallen, up 4.05% and 27.42% said there had been no change, down 2.52%.
One other interesting point which came out from the analysis is that potential property investors are more active now, thanks to the falls in asking prices, and importantly, the burning fuse with regards to ending negative gearing should Labor win the next election. Thus we have seen a rise in investors considering transacting. Some lenders are offering “special” fixed rate offers, in the light of APRA’s hands off approach, and of course Hayne did not do anything on responsible lending. The tighter underwriting standards are still in play of course – for now – but I would not bee surprise to see a kick up in new investor lending in the weeks ahead, despite the lower levels of financial confidence.
In summary then, interesting times as household finances are squeezed, yet the fixation on property for many Australians remains strong. There is still a belief that falls will be limited, and they will bounce back. We are not so sure!
David Malpass
is currently Under Secretary of the United States Treasury with
responsibility for International Affairs, and his previous experience
includes being chief economist at Bear Stearns prior to their collapse.
Our Treasurers support is wrong headed.
No matter what the strengths of David Malpass, the next World Bank President should not be American.
After World War Two the victors designed many of our global
institutions, including the World Bank, and the International Monetary
Fund. Major global institutions were headquartered in Europe or the
United States, and there was an agreement that the World Bank President
would be a US citizen, while the IMF would be headed by a European.
This cosy arrangement was fine for most of the 20th century, but is at odds with our 21st century world.
Trump’s unspoken ultimatum
It has been suggested that Trump would follow his usual negotiating
tactics and withdraw support from the World Bank if the next chief is
not American, which is presumably why some countries including Australia
are likely to support Malpass.
The search for the US nomination was headed by Steven Mnuchin and Ivanka Trump, with Invanka Trump herself mentioned as a possible nomination.
Malpass may be a better candidate than the President’s daughter, but I doubt it.
Malpass has been a critic of World Bank lending to China and at Bear Stearns he ignored warning signs of crisis in 2007.
But it’s not so much Malpass’ dubious credibility that is the
problem, but the idea that the President should always be American.
The American might not be the best candidate
Important global institutions should be led by the best candidate.
The views and expertise of emerging market candidates, particularly from
larger economies such as China, India, Brazil, Nigeria and Indonesia
should be taken more seriously.
In recent years the IMF would have been much better led by a
non-European. The decision to bail out French and German banks at the
expense of the Greek economy in 2012 was a poor decision made by the
French head of the IMF.
The IMF rightly supported restructuring of banks and financial
markets after the Asian Financial Crisis in 1997, but did not push for
the same for European or US banks after 2008.
So what if Australia and other middle powers did not support Malpass’ nomination?
Better off without the World Bank?
A US withdrawal from the World Bank would probably see its demise. But so what?
The World Bank has become relatively toothless.
Last year China lent more money to emerging market economies than the World Bank.
And this is the point. China needs to be brought into the World Bank and other institutions more fully, not sidelined.
Problems with governance and other issues with China’s Belt and Road initiative would be much better handled by a multilateral agency, whether that is a properly renewed World Bank or a new institution.
Welcome to the Property Imperative weekly to the ninth of
February 2019 – our digest of the latest finance and property news with a
distinctively Australian flavour.
This was a mega week in which the Royal Commission reported, mortgage brokers were crushed, the RBA cut growth expectations, and we saw more confirmation of the pressures on households. And NAB lost both its Chairman and CEO. So let’s get started.
Read the transcript or watch the video.
The final report from the Royal Commission was disappointing, in that
whilst 20 plus companies will be referred for potential criminal proceedings,
and NAB was called out for not getting it, and the 76 recommendations may be
worthy, – we discussed the recommendations in more detail in our post “A Banking Royal
Commission Special Report” , the report failed to address two
critical issues. Hayne has left lending practices where they are (yes, the
banks have tighter standards now, at least temporarily, but he left the
household expenditure measure benchmark question hanging) and failed to address
the question of conflict between providing advice and selling financial
services products, which was at the heart of the hearings. Too often advice let
to customers buying products which maximised the income of advisors and firms, when
they were not necessarily in the best interests of said customer. See our post “Why The Royal Commission Report Is A Fail”.
Paul Keeting, the architect of financial deregulation in the 1980’s was
quoted as saying in the Australian “The royal commissioner should have
recommended — this conflict between product and advice — be prohibited. This he
monumentally failed to do. He should have acted upon the examination and the
evidence of these serious conflicts of interest.”
Finance sector stocks when higher before the report was released, and
some are suggesting insiders made $20 billion or so as a result. A leak was
denied by The Government of course, but we are not so sure. There were massive stock movements at 11:00
am on Monday, when remember the report was made public AFTER the market had
closed at four PM.
Mortgage brokers got a shock, because their business models are potentially
crushed. The Commission proposes that trail commissions – payments in
subsequent years to brokers by banks for loans they introduced – should be
banned – as quote “they are payments for no value”. And in due course brokers
need to move to a fixed fee arrangement, paid for by the borrower, which would
make the arrangement more transparent, but may restrict competition, and swing
momentum back to the big banks, who would be set to benefit. I discussed this
with mortgage broker and financial adviser Chris Bates – see “What Does The Hayne
Report Mean To Mortgage Brokers And Financial Advisers?”. They will also be given a requirement to act
in the best interest of their clients, something which is assumed by many
customers of brokers today, but which is not currently the case.
So, in summary, Hayne will be remembered more for the exposes in the
hearings, where the bad conduct and criminal behaviour of the finance sector were
revealed, rather than firm recommendations to make substantive changes. It
mostly falls back to the institutions and regulators to heal themselves. I am
less confident, so expect bad practice to continue. NAB lost their chairman and CEO, they were
both called out as not getting the problem in the bank – and it is possible
that other heads will roll as criminal proceedings commence, but I suspect most
will remain unpunished.
The RBA had a big week, with Governor Lowe speaking at the National
Press Club on Wednesday, and then releasing the Statement on Monetary Policy on
Friday. Lowe’s view is that economic growth will slow a bit compared with
previous forecasts – 3% this year and 2.75% beyond. He believes income growth
will start to lift as the unemployment rate slides further. He thinks this will
be enough to keep the economy ticking over. Despite this, there is now, he says
equal weight to both a fall in the cash rate or a rise. And in the SMOP, there was recognition that
falling home prices may have a dampening effect on consumption and growth as
the “wealth effect” dissipates. Many
suggest, this downside risk is still underplayed. Plus, the new headline inflation number for
June 2019 came it at a low 1.25% in the statement, which is a significant
reduction.
Damien Boey at Credit Suisse said “We cannot help but feel that the RBA
is missing something in all of this, hence its rather shallow downgrades to
consumption growth forecasts, and its optimistic forecast for only a 10%
reduction in residential investment this year. … If the Bank does not
understand or admit to the nature of banking and credit problems, it will
always think that the economy is healthier than it is. It will always have too
high a view of the potency of rate cuts, and therefore delay them until the
last minute”.
Westpac’s Bill Evans said of the
RBA’s move, “This move to a balanced
rate outlook is significant because it clearly establishes that the Bank is
prepared to contemplate rate cuts – a position that has really only emerged
since the housing markets have reversed. It is also consistent with changes
announced by other central banks notably the US Federal Reserve.” Of course, bond rates remain higher in the US
than here, which is unusual, and signals higher bank funding costs ahead. This was something which CBA signalled in
their results out this week. So, I am expecting more out of cycle mortgage rate
hikes ahead.
My own view has been for some time that cash rate cuts won’t have much
impact, but thanks to the budget trends, there is capacity for quite big tax
cuts to try and stimulate consumption. I expect the upcoming budget to start
that trend, and there will be more fiscal loosening later in the year as the
economy weakens.
The latest news on home prices is more of the same. Down, down, prices are down. CoreLogic’s 5-city dwelling price index slide another 0.24%. The quarterly declines are rising to 3.57% and values have fallen by 8.5% since their most recent peak, with Sydney down 12.5%, Melbourne down 9.0% and Perth down 16.7%. Remember these are averages, and in some areas, prices are down more than 20%; with more to come. And the auction results remain in the doldrums, on low volumes and clearance rates the national auction clearance rate dropped 5.0% to 42.8%. In Sydney auction clearance rate fell by 4.2% to 49.5% though in Melbourne it rose a tad to 44.3%, both well below the trends from a year ago.
And by the way CBA senior economist, Gareth Aird showed the correlation
between home prices and jobs growth, which goes counter to the RBA’s view that
jobs momentum will support prices.
Another reason why we think prices will go on sliding.
All of this is in stark contrast to the ME Bank Household Comfort report
out this week. The most shocking chart
was the high proportion of households who still think prices will rise. Only
13% of homeowners and 11% of investors expect the value of their properties to
fall this year, versus 38% of homeowners and 52% of investors that believe
property prices will rise either a “little” or a “lot”. Clearly more should be
watching our shows. But then price growth expectations, are wired in – many
have never seen falls – and the real estate sector, still are saying things are
on the turn, and she’ll be right. Sorry, to disappoint, but there are more
falls to come. And by the way that same
report said it was the renting sector who are felling more bullish as rents
slide.
The ANU, as reported in the Australian, said that the average household
has seen no gains in their after-tax income since the end of 2010, which was
when the economy was emerging from the global financial crisis. According to ANU’s
Centre for Social Research and Methods, the fall in the past three years was
greater than during the last recession in 1991-92. In fact, living standards
peaked in 2011. There was no improvement for the next four years, but incomes
started falling behind rising living costs from late 2015 onwards. Many will
not be surprised, and it helps to explain why we think household consumption
will continue to fall.
NABs surveys this week also highlighted concerns among households. They
said that anxiety increased most over the cost of living, and despite a healthy
labour market, concerns over job security also climbed to its highest level
since mid-2016.
“In terms of household finances, retirement remains the big worry,
followed by providing for the family’s future, raising $2,000 for an emergency,
and medical and healthcare costs”.
“Against this background, almost four in 10 Australians said they had
experienced some form of financial hardship last quarter, the highest in two
years.” And importantly spending plans are being curtailed, which will flow on
to lower growth of course.
And our own
mortgage stress data for January underscored the pressure on
households. The long grind in WA
continues, with more households under financial pressure, but we are seeing
further deterioration in other states too. The number of households in severe
stress continues to rise. The latest RBA data on household debt to income to
September fell a little to 188.6, but remains highly elevated. The housing debt
ratio continues to climb to a new record of 139.6, according to the RBA. This shows that household debt to income is
still increasing. This high debt level
helps to explain the fact that mortgage stress continues to rise. Across
Australia, more than 1,026,106 households are estimated to be now in mortgage
stress (last month 1,023,906), another new record. This equates to more than
31% of owner-occupied borrowing households. In addition, more than 25,750 of
these are in severe stress (last month 22,000). We estimate that more than
63,000 households risk 30-day default in the next 12 months, up 1,000 from last
month. We continue to see the impact of flat wages growth, rising living costs
and higher real mortgage rates. Bank
losses are likely to rise a little ahead. See our Video “Mortgage Stress
Exists – Believe It!”
Despite the popular view that household finances are fine, in fact the
continued accumulation of larger mortgages compared to income whilst costs are
rising, and incomes static explains the issues we are now seeing. Housing credit growth is running
significantly faster than incomes and inflation and continued rises in living
costs – notably child care, school fees and electricity prices are causing significant
pain, this despite some relief at the bowser. Many continue to dip into savings
to support their finances. We are
seeing a rise in households seeking help with their finances, including access
to debt counsellors and other advice channels. WA is seeing very strong growth
in cries for help!
Indeed, the ABC reported that the National Debt Helpline said calls had
skyrocketed in Western Australia amid epidemic of financial stress. And we note
that the Treasurer just announced a review of financial counselling: “ It
will consider gaps and overlaps in current services and the adequacy of
appropriate delivery models for future funding”. Last week John Adams and
I highlighted the
possible link between mortgage stress and family violence, as suggested by the
police.
And finally in our local round up, Business Confidence is
also tanking according to Roy Morgan Research who released their Survey for
January. They say that confidence has dropped to its lowest level since August
2015 and it was the worst January result ever. “The decline in Business
Confidence to begin 2019 comes amidst a slew of poor economic news with
significant declines in house prices in Sydney and Melbourne over the last 12
months now joined by lower than expected retail trade figures for December”. This
is consistent with the NAB results we reported last week.
So, to the markets. Locally, the ASX 100 had a good run, as the Hayne effect dissipated. The index slid a little on Friday though thanks to the RBA’s downgrades, slipping 0.3% to end at 5,006.4, territory not seen since October, and up 3.56% on a year ago. The local volatility index was down 0.29% to 12.90, and 30.48% lower than a year back, reflecting a “risk on” peak back then.
Since the FED turned turtle on its interest rate policy, the markets confidence is roaring back. Not surprisingly, the ASX Financials Index was up this week, as banks were back in favour, despite a small fall on Friday, to end at 5,911.90, still 5.71% lower than a year ago. Individual banks moved round a bit with ANZ up 0.11% on Friday to end at 26.89, down 2.79% from a year back. CBA also rose, up 0.93% on their results, which revealed strong capital but weaker margins and profit below expectation and ended at 74.75, which is 2.58% lower than a year back. NAB fell following the resignation of the CEO and Chairman, to end at 24.75. In fact, this is not the first time NAB has lost leadership after a crisis. Their shares are down 12.27% lower than a year ago, suggesting that relative to peers they have a lot to do to regain market confidence. Their quarter disclosure which came out on Friday, would have not lifted expectations, as again margin is under pressure, and capital fell. It will be interesting to see if the proposed divestments of NABs and CBA wealth businesses continue given Haynes weak recommendations. Strategy may yet be reversed. Westpac fell 0.33% on Friday to end at 26.79, and down 10.84% from a year back. They still have their wealth businesses.
Among the regionals, Bank of Queensland rose 0.09% to 10.66, but is still 10.56% down from a year ago. Suncorp fell 0.22% to 13.61, up 3.73% from last year, and Bendigo and Adelaide Bank fell 1.59% to 11.15, up 0.36%. They may be more impacted by the proposals to charge customers for mortgage advice. AMP was down 1.21% on Friday, having had a small bounce from the Royal Commission report, because it will allow them to continue to run their advice and product businesses in tandem. AMP ended at 2.44 and remains 51.49% lower than a year ago. Macquarie fell 1.23% to 121.57, but is up 19.5% from a year back, benefitting from its international businesses.
Lenders Mortgage Insurer Genworth was up 1.62% on the
latest results, which showed a strong capital position, even if mortgage
delinquencies were a little higher, especially in NSW. They ended at 2.51 and
is 10.58% lower than 12 months ago. Given lower mortgage volumes, their growth
appears limited and if household pressures continue, we must expect more
defaults ahead. Mortgage Choice, the aggregator, was hit by the Hayne
recommendations on mortgage brokers this week, but rose on Friday, up 2.44% to
84 cents, down 62.61% from a year ago. Given they have advice businesses in
their portfolio, I suspect they might do quite well from the changes, if they
can morph their business effectively.
The Aussie ended the week at 70.91, up 0.04%, having been
above 72 earlier in the week after the Hayne report came out. But the RBA’s
neutral stance on future interest rates – signalling more trouble in the
economy, dragged it back. We still expect further falls ahead. It is still
9.89% lower than a year ago.
The Aussie Gold Cross rate rose 0.49% to end at 1,853.59,
up 9.97% on a year ago, while the Aussie Bitcoin Cross rose 4.88% to 4,672.3,
down 53.42% on a year back.
Overseas, at the close, the Dow Jones Industrial Average
declined 0.25%, to 25,106.33 and is 1.11% up from a year back. The S&P 500
index gained 0.07%, to 2,707.88 and is up 0.91% from a year ago, It has risen
more than 15 percent from 20-month lows in December, spurred by a dovish
Federal Reserve and largely positive fourth-quarter earnings, as well as hopes
for an eventual U.S.-China trade deal, despite lingering scepticism over the
United States and China reaching a trade deal before the March 1 deadline. Of
the S&P 500 companies that have reported quarterly results, 71.5 percent
have beaten profit estimates but analysts now expect current-quarter profit to
dip 0.1 percent from the year before, not grow the 5.3 percent estimated at the
start of the year. The S&P 100 was down a little to end at 1.190.16, up
0.28% over the year. The CBOE Volatility Index, which measures the implied
volatility of S&P 500 options, was down 3.97% to 15.72 and is down 40.97%
form 12 months ago. The S&P Financials index was down 0.94% on Friday to
427.88 and remains 8.02% down from a year back. Bellwether Goldman Sachs fell
0.73% on Friday to 191.67 and is 24.89% lower than last year.
The NASDAQ Composite index climbed 0.14% to 7,298.20 on
Friday and is up 3.35% from last year at this time. Apple was up 0.12% to 170.41 and is 7.15%
higher than last year. Google’s Alphabet fell 0.32% to 1.102.38 and is 4.78%
than a year back. Amazon fell 1.62% to 1,588.22 but is 13.95% higher than 12
months ago and Facebook is up 0.57% to 167.33, down 7.66% from a year back.
Intel fell 0.79% to 48.84 and is up 8.52% from last year.
Investors remain jittery about trade tensions between the
U.S and China, which have been the catalyst for the global trade war that
rocked equity markets. Although the sides met for talks last week in
Washington, there have been no signs of progress. On Thursday, U.S. stock
markets fell after President Trump said that he had no plans to meet with Chinese
President Xi before March 2, when further U.S. tariffs are scheduled to be
imposed.
The Feds pussy cat approach to future rate rises has seen
the 10-year bond rate come back, and on Friday it was at 2.63, down 0.76%. The
3-month rate was at 2.42, up 0.41%. The
US Dollar index was up 0.13% to 96.64, up 7.04% from last year, while the
British Pound USD slid a little to 1.2945 and is 6.71% lower than 12 months
back.
The UK Footsie was down 0.32% to 7.071.18 as the Brexit
discussions continue, and the deadline looms. Its down 2.55% from a year back.
The Footsie Financials Index was down 0.84% to 646.19, down 3.85% from last
year. The Euro USD was at 1.1331, down 7.53% from 12 months back. The European
Commission has projected moderate growth in the EU in 2019, but economic
uncertainty has dampened confidence. The forecast lowered its growth forecast
for the eurozone to 1.9% in 2018, down from 2.1% in the November forecast. The
report highlighted Brexit and the slowdown in China as key sources of uncertainty
for European economies, adding that the projections were subject to downside
risks.
Deutsche bank was down 2.56% on Friday, to 7.223 and is 40.09% down from
this time last year. The Chinese Yuan US Dollar ended at 0.1483 and is 7.02%
lower than last year. Crude Oil Futures rose a little, up 0.11% to 52.70 but
remains 15.08% lower than last year at this time.
Gold futures were higher, up 0.32% to 1,318.35, down 2.48% from a year
ago, Silver was up 0.73% to 15.83 and is 3.04% lower than last year, while
Copper was down 0.55% to 2.81, down 8.29% from 12 months ago. And finally, the
Bitcoin USD ended the week at 3.716.9, up 8.17% but is still 54.69% lower than
a year ago. The total capitalization of the derivatives markets at BTC/USD was
$156 million US Dollars. Worth bearing in mind how small the market truly is!
So, we see the change in the wind which the Fed triggered earlier in the
month flowing on to strong markets, despite the uncertainties around global
growth ahead. Locally as the dust settles on the Hayne report, we expect bank
stocks to remain volatile – remember there are still more criminal cases in the
works – eventually. But meantime the focus will be on the Australia economy, as
the leading indicators signal more trouble ahead, and the RBA plays catch up.
In this context, there can be little expectation of a rebound in home
prices, nor a resurgence of lending for mortgages, I think the current settings
will mean falls continue, and may accelerate. The next thing to watch for are
“unnatural acts” fiscally speaking when the budget comes down in April, before
a May election. Unless something unexpected resets the timetable.
Meantime, my advice remains be very cautious about property. There is no
hurry to buy. Falling prices may offer opportunity later, but buying into a
falling market, even at these low interest rates is tricky, and as I have
indicated I expect more out of cycle hikes to come. So, caution is the watch word. But the good
news/bad news is the risk of a financial apocalypse has abated in favour of
another round of debt creation – which postpones what may well be eventually a
significant reset. We will update our
scenarios soon.
And before I go, a quick reminder that our next live stream event is now scheduled for Tuesday 19th February at 8:00 PM Sydney – here is the link to the reminder. You can ask a question live or send them in beforehand. I look forward to seeing you there.
And by the way, if you value the content we produce, please do consider supporting our efforts. You can make a one off donation via PayPal, or consider joining our Patreon programme. We really appreciate your support to help us continue to make great content.
Digital Finance Analytics (DFA) has released the January 2019 mortgage stress and default analysis update. The long grind in WA continues, with more households under financial pressure, but we are seeing further deterioration in other states too. The negative wealth effect is biting now.
The number of households in severe stress continues to rise. The latest RBA data on household debt to income to September fell a little to 188.6[1], but still remains highly elevated. The housing debt ratio continues to climb to a new record of 139.6, according to the RBA. This shows that household debt to income is still increasing.
This high debt level helps to explain the fact that mortgage stress continues to rise. Across Australia, more than 1,026,106 households are estimated to be now in mortgage stress (last month 1,023,906), another new record. This equates to more than 31% of owner occupied borrowing households.
In addition, more than 25,750 of these are in severe stress (last month 22,000). We estimate that more than 63,000 households risk 30-day default in the next 12 months, up 1,000 from last month. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates. Bank losses are likely to rise a little ahead.
Our analysis uses the DFA core
market model which combines information from our 52,000 household surveys,
public data from the RBA, ABS and APRA; and private data from lenders and
aggregators. The data is current to the end of January 2019. We analyse
household cash flow based on real incomes, outgoings and mortgage repayments,
rather than using an arbitrary 30% of income.
Households are defined as
“stressed” when net income (or cash flow) does not cover ongoing costs. They
may or may not have access to other available assets, and some have paid ahead,
but households in mild stress have little leeway in their cash flows, whereas
those in severe stress are unable to meet repayments from current income. In
both cases, households manage this deficit by cutting back on spending, putting
more on credit cards and seeking to refinance, restructure or sell their home. Those in severe stress are more likely to be
seeking hardship assistance and are often forced to sell.
Despite the popular view that household finances are fine, in fact the continued accumulation of larger mortgages compared to income whilst costs are rising and incomes static explains the issues we are now seeing. Housing credit growth is running significantly faster than incomes and inflation, and continued rises in living costs – notably child care, school fees and electricity prices are causing significant pain, this despite some relief at the bowser. Many continue to dip into savings to support their finances. We are seeing a rise in households seeking help with their finances, including access to debt counsellors and other advice channels. WA is seeing very strong growth in cries for help!
Just a day after the ABC reported that the National Debt Helpline said calls had skyrocketed in Western Australia amid epidemic of financial stress.
While Commissioner Hayne made no recommendation in regard to a review of financial counselling, the Government recognises that it is a vital service used by thousands of Australians every year.
For this reason, we are commencing an immediate review that will focus on the coordination and funding of financial counselling services. It will consider gaps and overlaps in current services and the adequacy of appropriate delivery models for future funding.
Indeed, the fact that significant
numbers of households have had their potential borrowing power crimped by
lending standards belatedly being tightened, and are therefore mortgage
prisoners, is significant. More than 40% of those seeking to refinance are now
having difficulty. This is strongly aligned to those who are registering as
stressed. These are households urgently
trying to reduce their monthly outgoings”.
The next question to consider is which households are being impacted. In fact, negative equity is touching “lots of different segments” of the market for different reasons, but collectively it is an “early warning sign” for what is to come. We discussed this is a recent post “The Negative Equity Hot Spots”.
Probability of default extends our
mortgage stress analysis by overlaying economic indicators such as employment,
future wage growth and cpi changes. Our
Core Market Model also examines the potential of portfolio risk of loss in
basis point and value terms. Losses are likely to be higher among more affluent
households, contrary to the popular belief that affluent households are well
protected. This is shown in the segment
analysis below:
Stress by the numbers.
Regional analysis shows that NSW has
282,165 households in stress (278,959 last month), VIC 278,860 (285,723 last
month), QLD 185,493 (180,794 last month) and WA has 139,621 (135,548 last month).
The probability of default over the next 12 months rose, with around 11,650 in
WA, around 11,600 in QLD, 15,600 in VIC and 16,600 in NSW.
The
largest financial losses relating to bank write-offs reside in NSW ($1.1
billion) from Owner Occupied borrowers) and VIC ($1.48 billion) from Owner
Occupied Borrowers, though losses are likely to be highest in WA at 3.6 basis
points, which equates to $1,022 million from Owner Occupied borrowers.
The top 20 post codes are listed below.
[1] RBA E2 Household Finances – Selected Ratios September 2018
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Note that the detailed results from our surveys and analysis are made available to our paying clients.
RBA Governor Philip Lowe, addressed the National Press Club today, providing an upbeat assessment of the economy. He was even money on the next rate move, but interestingly he blamed lack of supply of housing not credit supply, or low interest rates for high home prices. He believes wages will rise, eventually. And finally he down rated the international risks, such asset price bubbles, in favour of a arrange of more political risks. Mr optimistic.
And regulators are not be blamed for the poor outcomes from the finance sector, as highlighted by the Royal Commission.
The Aussie slid on the remarks.
Thank you for the opportunity to address the National Press Club. It is an honour to have been invited.
The media and the RBA have a special relationship. Most people in the community hear the RBA’s
messages through the media. You report on what we say, you filter it and you critique it. We
also help you with your work. The RBA is a reliable source of information and analysis on issues
that your audiences care about, including interest rates, housing prices and jobs. This means we
have a strong mutual interest in understanding one another. I hope that today will help
strengthen that understanding.
This is my first public speech for 2019, so I would like to talk about the year ahead and some of
the key issues that the RBA will be focusing on. I will first discuss the global economy and
then turn to the Australian economy and particularly the outlook for household spending. I will
finish with a few remarks on the outlook for monetary policy.
At the outset, I want to emphasise that we don’t have a crystal ball that allows us to see
the future with certainty. I know many of you are looking for definitive answers to questions
like, ‘Where will the cash rate be this time next year?’, ‘How
much will housing prices fall?’, ‘When will wages growth
reach 3 per cent?’. They are all good questions. The reality, though, is that
the future is uncertain. None of us can say with certainty what will happen.
What the RBA can do, though, is highlight the issues that are likely to shape the future, explain
how we are thinking about those issues, and discuss how they fit into our decision-making
framework. That is what I hope to do today.
The Global Economy
I will start with the global economy, because what happens overseas has a major bearing on what
happens in Australia. My main point here is that while some of the downside risks have
increased, the central scenario for the world economy still looks to be supportive of growth in
Australia.
It is worth recalling that 2018 was a good year for the world economy. Growth in the advanced
economies was above trend in the first half of the year, unemployment rates reached their lowest
levels in many decades, inflation was low and financial systems were stable (Graph 1).
These are positive outcomes. We should not lose sight of this.
Graph 1
There was, though, a change in momentum in the global economy late in the year. This change was
particularly evident in Europe and it was also evident in China. It has been widely reported in
the media, but it is important to keep things in perspective.
Some slowing in global growth was expected, given that labour markets are fairly tight and the
policy tightening in the United States was aimed at achieving a more sustainable growth rate.
So, I have been a little surprised at some of the reaction to the lowering of forecasts for
global growth, which has been quite negative. We need to remember that the IMF’s central
forecast is still for the global economy to expand by 3.5 per cent in 2019 and by 3.6 per cent
in 2020 (Graph 2). If achieved, these would be reasonable outcomes and not too different
from the recent past.
Graph 2
What is of more concern, though, is the accumulation of downside risks. Many of these risks are
related to political developments: the trade tensions between the United States and China; the
Brexit issue; the rise of populism globally; and the reduced support from the United States for
the liberal order that has supported the international system and contributed to a broad-based
rise in living standards. One could add to this list the adjustments in China as the authorities
rein in shadow financing.
The origins of these diverse issues are complex, but there is a common economic element to some
of them: that is, the extended period of little or no growth in real incomes for many people. In
a number of countries, growth in real wages has been weak or negative for years. Advances in
technology and greater competition as a result of globalisation also mean that many people worry
about their own future and that of their children. Politicians, understandably, are responding
to these concerns. Time will tell, though, whether the various responses help or not. I suspect
that some of them will not.
Over recent months, the accumulation of downside risks has been evident in business and consumer
surveys. It was also evident in increased volatility in financial markets around the turn of the
year, with declines in equity prices and an increase in credit spreads (Graph 3). Since
then, though, markets have been more settled and some of the earlier decline in equity prices
has been reversed. This has been partly on the back of a reassessment of the path of monetary
policy in the United States, with markets no longer pricing in further increases in US interest
rates. There has also been a noticeable fall in long-term government bond yields.
Graph 3
The adjustments in financial markets over our summer sometimes generated reporting that, to me,
seemed overly excitable. I lost count of how many times I read the words ‘crash’,
‘plunge’ and ‘dive’. Yet there is a positive side to some of these
adjustments, which gets less reported on. The risks associated with stretched valuations in some
equity markets have lessened. So, too, have concerns that very low credit spreads could lead to
an excessive build-up of risk. And risks in many emerging market economies have also receded,
helped by the lower global interest rates and lower oil prices. So it is important to look at
the whole picture.
For Australia, what happens in China is especially important. Growth there has slowed. From a
medium-term perspective, this has a positive side, as it mainly reflects efforts to rein in
risky financial practices and stabilise debt levels. But the slowing is probably faster than the
government had hoped for, with the economy feeling the effects of the trade dispute with the
United States and the squeezing of finance to the private sector. The authorities have responded
by easing policy in some areas, but they are walking a fine line between supporting the economy
and addressing the debt problem. There is also the question of how the economy responds to the
policy easing.
More broadly, we cannot insulate ourselves completely from the global risks, but keeping our
house in order can go a long way to assist. Our floating exchange rate and the flexibility we
have on both monetary and fiscal policies provide us with a degree of insulation. So, too, does
our flexible labour market. Ensuring that we have predictable and consistent economic policies,
credible public institutions and a reform agenda that supports a strong economy can also help in
an uncertain world.
The Domestic Outlook
I would now like to turn to the outlook for the Australian economy. Much as is the case globally,
the downside risks have increased, although we still expect the Australian economy to grow at a
reasonable pace over the next couple of years.
The Australian economy is benefiting from strong growth in infrastructure investment and an
upswing in other areas of investment. The labour market is also strong, with many people finding
jobs. This year, we will also benefit from a further boost to liquefied natural gas (LNG)
exports. The lower exchange rate and a lift in some commodity prices are also assisting. Against
this generally positive picture, the major domestic uncertainty is the strength of consumption
and the housing market.
We will be releasing a full updated set of forecasts in the Statement on Monetary
Policy (SMP) on Friday. Close readers of the SMP will notice that we will now be
publishing forecasts for a wider set of variables than has previously been the case.[1] We hope that
this helps people understand the various forces shaping the economy.
Today, I can give you a summary of the key numbers.
Our central forecast is for the Australian economy to expand by around 3 per cent over
2019 and 2¾ per cent over 2020 (Graph 4). For 2018, the outcome is expected
to be a bit below 3 per cent. This type of growth should be sufficient to see further
gradual progress in lowering unemployment.
Graph 4
These forecasts are lower than the ones we published three months ago. For 2018, the outcome is
affected by the surprisingly soft GDP number in the September quarter and the ABS’s downward
revisions to estimates of growth earlier in the year. We are expecting a stronger GDP outcome in
the December quarter, with other indicators of economic activity painting a stronger picture
than suggested by the September quarter national accounts.
For 2019 and 2020, the forecasts have been revised down by around ¼ percentage point,
largely reflecting a modest downgrading of the outlook for household consumption and residential
construction. I will talk more about this in a moment.
The outlook for the labour market remains positive. The national unemployment rate currently
stands at 5 per cent, the lowest in over seven years (Graph 5). In New South
Wales and Victoria, the unemployment rate is around 4¼ per cent. You have to go
back to the early 1970s to see sustained lower rates of unemployment in these two states. The
forward-looking indicators of the labour market also remain positive. The number of job
vacancies is at a record high and firms’ hiring intentions remain strong. Our central
scenario is that growth will be sufficient to see a modest further decline in unemployment to
around 4¾ per cent over the next couple of years.
Graph 5
The other important element of the labour market is how fast wages are increasing. For some time,
we have been expecting wages growth to pick up, but to do so gradually. The latest data are
consistent with this, with a turning point now evident in the wage price index (Graph 6).
Through our discussions with business we are also hearing more reports of firms finding it
difficult to find workers with the necessary skills. In time, this should lead to larger wage
rises. This would be a positive development.
Graph 6
Given this outlook, we continue to expect a gradual pick-up in underlying inflation as spare
capacity in the economy diminishes (Graph 7). However, the lower forecast for growth means
that this pick-up is expected to occur a bit later than we’d previously thought. Underlying
inflation is now expected to increase to about 2 per cent later this year and to reach
2¼ per cent by the end of 2020. The latest CPI data were consistent with this
outlook. The headline CPI number was, however, a bit lower than we had previously expected,
reflecting the decline in petrol prices that started late last year. We expect headline
inflation to decline further this year as the full effect of lower petrol prices shows up in the
figures.
Graph 7
So that is the summary of the key numbers.
As always, there is a range of uncertainties, many of which will be discussed in the SMP on
Friday. Today, though, I would like to focus on the outlook for household spending, which is
closely linked to the housing market and the prospects for growth in household income.
Before I do that, I would like to touch on one related uncertainty that we have been paying
attention to – that is the supply of credit. This is because a strong economy requires
access to finance on reasonable terms. Over recent years there has been a needed tightening of
credit standards. But the right balance needs to be struck. As lenders have sought to find that
balance, we have had some concerns that the pendulum may have swung too far the other way,
especially for small business.
In that context, I welcome the report of the Royal Commission and the Government’s response.
The Commission’s recommendations that bear on credit provision are balanced and sensible,
and should remove some uncertainty. I also welcome the Commission’s focus on: the importance
of service – as opposed to sales – in the financial sector; the necessity of dealing
properly with conflict of interest issues; and the importance of accountability when things go
wrong. These are all issues I have spoken about on previous occasions. Addressing them is
central to rebuilding the all-important trust in our financial system.
Housing Prices and Household Income
But back to household consumption and the housing market.
You might recall that 18 months ago, one of the most talked about issues in the country was the
high and rising cost of housing. This was understandable. In some of our cities, purchasing a
home had become a very difficult stretch for many people, and this had become a major social
issue.
Today, the talk is about prices falling in our two largest cities. We have moved almost
seamlessly from worrying that prices were going up, to worrying that they are going down.
There is no single reason for this change, but, rather, it is the result of a number of factors
coming together.
One is that housing prices simply increased to the point in Sydney and Melbourne where demand
tailed off, as purchasing a home had become very expensive and less attractive as an investment.
A second is that the building boom over recent times significantly increased the supply of
dwellings. It took a number of years before the rate of home construction picked up in response
to faster population growth, but eventually it did pick up. This explains much of the cycle.
A third factor is that the demand from overseas investors softened, partly in response to the
Chinese authorities making it more difficult to move money out of China.
And a fourth factor is that lending standards have been tightened and credit has become more
difficult to obtain.
Importantly, unlike most other housing price corrections, this one has not been associated with
rising unemployment or higher interest rates. Instead, mainly structural factors –
relating to the underlying balance of supply and demand – in our largest cities have been
at work.
The question is: what effect will this change have on household spending?
Here, my earlier observation about not having a crystal ball is relevant. At this point, though,
what we are seeing looks to be a manageable adjustment in the housing market. It is not expected
to derail economic growth. The previous trends in debt and housing prices were becoming
unsustainable and some correction was appropriate. We recognise that this correction will have
an effect on parts of the economy. But our economy should be able to handle this, and it will
put the housing market on a more sustainable footing.
There are a few considerations here.
The first is that the recent housing price declines follow very large increases in prices (Graph 8).
Even after the recent declines in Sydney, prices are still 75 per cent higher over the
decade. In Melbourne, they are 70 per cent higher. While the price falls are no doubt
difficult for some, including people who purchased in the past couple of years, there are many
people sitting on very significant capital gains and there are others who now will find it
easier to purchase a home. And of course, in a number of cities and much of regional Australia,
things have been more stable.
Graph 8
A second consideration is that most households do not change their consumption in response to
short-term changes in their wealth. Sensibly, many people tend to take a longer-term
perspective. During the recent upswing in housing prices, the strategy of borrowing against the
extra equity in your home looked less sensible than it once was, especially as debt levels rose.
Some home-owners also see themselves as being part of the ‘bank of mum and dad’.
This meant that they refrained from spending the extra equity so that they were able to help
their children purchase their own property.
A third and perhaps the most important consideration, is that household income growth is expected
to pick up and income growth usually matters more for consumption than changes in wealth.
For some years, growth in nominal aggregate household income has been unusually slow, averaging
just 2¾ per cent since 2016 (Graph 9). For some home-owners, rising housing
prices have provided an offset to this, even though the effect may have been smaller than in the
past. As a result, aggregate consumption has grown faster than income for the past few years.
But a shift is now taking place. Over the next year, we are expecting a pick-up in household
disposable income to provide a counterweight to the wealth effects of lower housing prices.
Graph 9
Labour market outcomes are key to this assessment. Continued employment growth and higher wages
growth should boost disposable incomes. The announced tax cuts should also help here. In our
central scenario, consumption is expected to grow at around 2¾ per cent over the
next couple of years, broadly in line with expected growth in disposable income. This is a bit
lower than our earlier forecast for consumption.
There are, of course, other possible outcomes. Continued low income growth, together with falling
housing prices, would be an unwelcome combination and would make for a softer outlook for the
economy. Some Australian households have high levels of debt, so there is a degree of
uncertainty about how they would respond to this combination. So we are monitoring things
closely.
The adjustment in the housing market is also affecting the economy through residential
construction activity and the spending that occurs when people move homes. Residential
construction activity is currently around its peak level and the large pipeline of approved
projects is expected to support activity for a while. Developers, though, are finding it more
difficult to sell apartments off the plan, and lenders are less willing to provide finance.
Sales of new detached dwellings have also slowed. The central forecast is for dwelling
investment to decline by about 10 per cent over the next two and a half years.
Putting all this together, our economy is going through an adjustment following the turn in the
housing markets in our largest cities. It is important that we keep this in perspective though.
The correction in the housing market follows an extended period of strength. It is largely due to
structural supply and demand factors, and is occurring against the backdrop of a robust economy
and an expected pick-up in income growth. Our financial institutions are also in a strong
position to deal with the adjustment. Indeed, lending standards were strengthened as the upswing
went on. From this perspective, the adjustment in the housing market is manageable for the
financial system and the economy. This adjustment will also help increase the affordability of
housing for many people. Even so, given the uncertainties, we are paying very close attention to
how things evolve.
Monetary Policy
This brings me to monetary policy.
The cash rate has been held steady at 1½ per cent since August 2016. This setting
has helped support the economy. The Reserve Bank Board has sought to be a source of stability
and confidence while our economy adjusted to the end of the mining investment boom and responded
to the shifting sands of the global economy.
Over the past couple of years, economic conditions have been moving in the right direction. The
labour market has strengthened, and the unemployment rate has fallen and a further decline is
expected. Inflation is also above its earlier trough, although it has not changed much over the
past year. Our expectation has been – and continues to be – that the tighter labour
market and reduced spare capacity will see underlying inflation rise further towards the
midpoint of the target range. Given this, we have maintained a steady setting of monetary policy
while the labour market strengthens and inflation increases.
Looking forward, there are scenarios where the next move in the cash rate is up and other
scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely
than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly
balanced.
We will be monitoring developments in the labour market closely. If Australians are finding jobs
and their wages are rising more quickly, it is reasonable to expect that inflation will rise and
that it will be appropriate to lift the cash rate at some point. On the other hand, given the
uncertainties, it is possible that the economy is softer than we expect, and that income and
consumption growth disappoint. In the event of a sustained increased in the unemployment rate
and a lack of further progress towards the inflation objective, lower interest rates might be
appropriate at some point. We have the flexibility to do this if needed.
The Board will continue to assess the outlook carefully. It does not see a strong case for a
near-term change in the cash rate. We are in the position of being able to maintain the current
policy setting while we assess the shifts in the global economy and the strength of household
spending.
It has long been the Board’s approach to avoid reacting to the high-frequency ebb and flow of
news. Instead, we have sought to keep our eye on the medium term and put in place a setting of
monetary policy that helps deliver on our objectives of full employment, an inflation rate that
averages between 2 and 3 per cent, and financial stability.
Thank you for listening. I look forward to answering your questions.
