‘Yes, we repriced the back book’: ANZ defends rate hikes

From The Adviser

ANZ chief executive Shayne Elliott CEO has explained how it was a first mover on mortgage repricing and why it made a decision to hike rates knowing full well that its customers could move to another lender.

He appeared in Canberra on Wednesday (11 October) where he answered questions before the House of Representatives Standing Committee on Economics, commonly known as the major bank review.

Committee chair David Coleman MP asked the ANZ boss why the group increased rates for existing loans earlier in the year when APRA’s 30 per cent interest-only cap was for new lending only.

“We run a business,” Mr Elliott said. “We need to make sure that it is prudent and that we identify risk and price for it appropriately while still providing a good, decent service to our customers.

“We started changing our approach in terms of lending standards, policy and pricing well before APRA put in place its speed limit. In fact, our first changes around interest-only started in April 2016. We made policy changes, we have reduced the amount of time people can have interest-only, and we have reduced the maximum LVR. That was well before [APRA’s speed limit] because we assessed that the risk in that book was changing and that we needed to be mindful of that.”

Mr Elliott said the first pricing changes the bank made were on 24 March, a week before APRA’s interest-only speed limit came into place.

“Subsequent to the speed limit we came out and reduced rates, we were the first. We reduced rates for people paying principal and interest and we increased others. We did that not knowing what our competitors would do and not knowing what the customer behaviour would be. But we wanted to reward customers who repaid principal, because it is the right thing to do, and we wanted to give them the right signals to move.

“Yes, we repriced the back book but, we also gave price cuts to the back book as well.”

ANZ CFO Graham Hodges added that the bank also introduced its lowest ever fixed-rate at 3.88 per cent for P&I borrowers.

Mr Coleman argued that it is “disingenuous” for a bank to tell its customers, who are not impacted by APRA’s regulatory action, that the bank has determined that it is good for them to move to P&I.

“First of all, we gave people a four-month notice period,” Mr Elliott said. “Whether that’s to move with us or a competitor. Also, when people come to us and asked for an interest-only loan, we assess them on the basis that they can afford to pay P&I from day one. We do assess people’s ability to be able to pay the principal.”

Mr Elliott said the bank modelled the impact of its pricing changes. Asked about the profitability of interest-only loans and the impact of repricing, the chief executive explained that the answer depends on customer behaviour.

“It depends what customers do,” he said, adding that there was an assumption in Mr Coleman’s question that all customers stay with ANZ and don’t move.

“About 10 per cent of our customers with a home loan choose to leave us and go somewhere else each year. There are a lot of factors.

“We absolutely ran an analysis and looked at the fact that by reducing P&I loans by 5 basis points it would come at a cost. That’s about two thirds of our customers who received the benefit of a rate cut.

“We were first. We did that not knowing what the competition would do and at a risk that a lot of those customers would vote with their feet and go somewhere else, or vote choose the fixed-rate, which is a much lower margin product.”

Interest-only loans currently account for approximately 34 per cent of ANZ’s total mortgage portfolio.

Westpac also faced tough questions from David Coleman in Canberra yesterday. Chief executive Brian Hartzer told the committee that interest-only loans accounted for 50 per cent of the Westpac mortgage book.

Financial Stability Improves, But Rising Vulnerabilities Could Put Growth at Risk

From The IMF Blog.

It seems like a paradox. The world’s financial system is getting stronger, thanks to healthy economic growth, buoyant markets, and low interest rates. Yet despite these favorable conditions, dangers in the form of rising financial vulnerabilities are starting to loom. That is why policymakers should act now to keep those vulnerabilities in check.

As we explain in the latest Global Financial Stability Report, the recovery from the global financial crisis isn’t yet complete. Central bankers rightly maintain easy policies to support growth. But this is breeding complacency and allowing a further build-up of financial excesses. Non-financial borrowers are taking advantage of cheap credit to load up on debt. Investors are buying riskier and less liquid assets. If left unattended, these growing vulnerabilities will continue to mount, threatening to derail the economic recovery when shocks occur.

Capital buffers

To be sure, there are reasons for optimism. Low interest rates and rising asset prices are spurring growth. Big, globally systemic banks – so called because the failure of just one of them could shake the financial system – have added $1 trillion to their capital buffers since 2009. Overseas investment into emerging market and low income economies has increased. The global economic upswing is laying hopes for a sustained recovery and allowing central banks to eventually return their monetary policies to normal settings.

So why should policy makers be concerned?

Let’s start with risks in financial markets. Before the crisis, there were $16 trillion in relatively safe, investment-grade bonds yielding more than 4 percent. That has dwindled to just $2 trillion today. There is simply too much money chasing too few high yielding assets. The result is that investors are taking more risks and exposing themselves to bigger losses if markets tumble.

New risks

Then there are rising levels of debt in the world’s biggest economies. Borrowing by governments, households and companies (not including banks) in the so-called Group of 20 exceeds $135 trillion, equivalent to about 235 percent of their combined gross domestic product. Despite low interest rates, debt servicing burdens have risen in several economies. And while borrowing has helped the recovery, it has also created new financial risks. For example, chapter two of the Global Financial Stability Report showed growth in household debt relative to GDP is associated with a greater probability of a banking crisis.

 China

In China, the size, complexity, and pace of credit growth points to elevated financial stability risks. Banking sector assets have risen to 310 percent of GDP, nearly three times the emerging-market average and up from 240 percent at the end of 2012. “Shadow” lending, including wealth management products, remains a big risk for smaller banks. The authorities have taken welcome steps to address these risks, but there is still work to do. Broader reform measures are necessary to reduce the economy’s reliance on rapid credit growth.

Low-income countries have also benefited from easy financial conditions by expanding their access to international bond markets. While borrowing has generally been used to fund infrastructure projects, refinance debt, and repay arrears, it has also been accompanied by an underlying deterioration of debt burdens as measured by the debt service ratio.

Policy implications

Overall, investors are growing complacent about potential shocks that could cause turmoil in markets. These include geopolitical risks, a surge in inflation, and a sudden jump in long-term interest rates. How should policymakers respond? There are several steps they can take:

  • Major central banks can avoid creating market turbulence by thoroughly explaining their plans to gradually unwind crisis-era policies.
  • To discourage riskier lending, financial regulators should deploy so-called “macroprudential” policies, such as limits on loan-to-value ratios for mortgages, for macro critical objectives.
  • Emerging-market and low income countries should take advantage of benign external conditions to reduce vulnerabilities and enhance resilience by enhancing underwriting standards, building capital and liquidity buffers, and increasing reserves.
  • Supervisors should focus more on the business models of banks to ensure sustainable profitability. We estimate that almost one-third of systemically important banks, with $17 trillion in assets, will struggle to achieve the profitability that’s needed to ensure their resilience to shocks.
  • The global regulatory reform agenda should be completed and fully implemented. Global cooperation remains essential.

With the right measures, policy makers can take advantage of these benign times to keep a lid on mounting vulnerabilities and ensure that the global economic expansion remains on track. This is not the time for complacency. The time to act is now. Otherwise, future growth could be at risk.

Chinese Still Buying Australian Property In Droves

According to new analysis by Credit Suisse, demand for housing from Chinese buyers remains strong, especially the purchase of new developments, and this will put a floor under property especially in the main urban centres of Sydney and Melbourne.

As reported in Business Insider, new restrictions on foreign investors are unlikely to stop the flow of housing demand from China, according to Credit Suisse analysts Hasan Tevfik and Peter Liu.

And crackdowns on capital outflows by Chinese authorities appear not have slowed China’s appetite for Australian property, the pair say.

The latest numbers are based on state tax revenue data obtained by Tevfik and Liu in March through a Freedom of Information Request.

“We calculate foreign buyers are acquiring the equivalent of 25% of new housing supply in NSW, 17% in Victoria and 8% in Queensland. Almost all of this is from China,” the analysts said.

Updated to June, the figures show that foreign buyers are snapping up Australian property at an annualised rate of $10 billion per year across NSW, Victoria and Queensland.

That’s only a small percentage of Australia’s $6.7 trillion housing market, but importantly, it makes up a significant percentage of the demand for new housing supply.

Nearly a third of new housing stock being built in NSW is being bought by foreigners. Obviously not all of that is for new dwellings, but the vast majority would be.

And while much has been made of the crackdown on investor-funds leaving China, the Credit Suisse research shows the actual impact has been minimal.

Here are Tevfik and Liu’s comments :

In December 2016, the Chinese authorities introduced new and stronger capital controls to slow money flowing out of the middle kingdom. Our tax receipt data help measure how effective these controls have been — and it seems they haven’t been. In NSW, where we have three complete (and reliable) quarters of tax receipt data, we can see foreign demand for property has so far hovered around $1.4 to $1.6bn per quarter.

After concluding that China’s crackdown doesn’t appear to be stemming off-shore capital flows, Tevfik and Liu also noted that Chinese investors are cashed up and ready to spend.

There are currently 1.6 million US dollar millionaires in China, and that converts to shared wealth of a whopping $13 trillion – around twice the size of Australia’s housing market.

“As our property market becomes more global perhaps we should be concentrating less on Australian incomes as a measure of buying power and more on wealth creation in the Asian region,” the analysts said.

So, what factors could stem the seemingly invevitable flow of capital from Asian markets into Australian property?

Tevfik and Liu highlighted the potential impact of recent tax increases on foreign investors introduced by Australian states, as well as the impact from a devaluation of the Chinese currency.

In June, NSW announced that it would double stamp duty on foreign investors from 4% to 8% while land tax would increase to 2% from 0.75%, effective from July 1.

Victoria and Queensland also impose additional taxes on foreign investors of 7% and 3% respectively, calculated as a proportion of the purchase price.

However, they said that past examples from other international suggest the impact on house prices will be small.

“The introduction or increase of a tax on foreign buyers seems to slow demand to a point where property prices decelerate, but it does not cause housing values to contract,” Tevfik and Liu said.

This chart shows the impact on house prices in other international markets after the implementation of tax increases on foreign investors.

“Based on the experience of other cities around the world, we do not believe the recent increase in taxes by NSW will cause property prices to contract,” the pair said. Although they added that Chinese investors are an easy target for Australian state governments, and didn’t rule out further rate increases in the future.

A more likely scenario to reduced demand, the analysts said, would be a devaluation of China’s currency, the renminbi.

“From our many and various discussions with Chinese investors and companies, there is a consensus view that the renminbi is set to depreciate further from here. If and when it does the buying power of Chinese investors will diminish.”

Tevfik and Liu noted that the renminbi has been broadly depreciating since 2014. In that context, they added that Chinese policy-makers are focused on stability ahead of the 19th Communist Party Congress later this month, but said movements in the currency after that will be worth monitoring.

In summary, the two analysts dispute recent reports suggesting foreign investor demand will slow. On the contrary, “we forecast these flows to continue at a strong pace and will serve to cushion the downside in activity and prices”, they said.

“It’s different this time. While we acknowledge residential investment and house price inflation are set to moderate we don’t think there will be a collapse. The foreign buyer has never before been as an important driver of the Australian housing market as she is now.”

How much Australia’s major banks will lend, based on your income?

From Business Insider.

By all recent accounts, Australian house prices are starting to cool.

And as the effect of macro-prudential measures and out-of-cyle rate hikes take hold, most analysts agree Sydney and Melbourne’s red-hot housing markets are unlikely to maintain their recent rate of growth.

Those market conditions have led some analysts to downgrade their forecasts for Australian banks, after the sector outperformed in recent years.

In September, Citi analysts outlined four factors which they expect will form a “boxed quartet” to weigh on bank earnings. That followed research from the UBS, where the banking team recommended that investors cut back on Australian bank stocks.

In particular, UBS cited risks around the ratio of household debt to disposable income in Australia, which is approaching 200%.

In addition to the banking sector, the extended debt-to-income ratio of many households has been cited as a key risk for the Australian economy, with consumers facing a “consumption crunch” from refinancing mortgages with low wage growth and rising energy costs.

In that context, the chart below from Morgan Stanley provides an interesting backdrop for how each of Australia’s major banks approach their lending practices with respect to customer income.

It shows the average loan-to-income (LTI) ratio of Australian mortgage holders is around 4.9 times, but among the major banks, the numbers vary quite considerably.

ANZ leads the way and is materially higher than its competitors, with an average loan size of $624,000 at an LTI ratio of 6.3 times.

Here’s the chart:

Morgan Stanley said that ANZ’s higher LTI ratio is reflective of a recent push to grow its loan-book for residential mortgages, with a focus on the NSW market.

As part of that strategy, the bank has issued a higher number of mortgages within the last two years — around 45% of its loan-book compared to the industry average of 35%.

Research from Commonwealth Bank last month showed that Sydney has the highest average loan size in Australia, with average monthly loan payments of $3,031 per month.

Conversely, the lower LTI of Bendigo & Adelaide Bank reflected a focus on regional Australia, where property prices are generally lower.

Looking at the figures across the industry, Morgan Stanley expects housing loan growth to slow in 2018, as regulators place more scrutiny on rising household debt levels.

“Regulators are increasingly concerned about household debt growing ahead of incomes and have indicated that LTI should become part of loan underwriting criteria,” Morgan Stanley said.

As cited by UBS, this chart from the RBA last week shows that Australian household debt is approaching double the amount of disposable income:

The LTI figures were derived from Morgan Stanley’s AlphaWise survey on the strength of household finances.

The survey revealed some concerning trends around the outlook for domestic consumption, with around 40% of respondents saying they had zero or negative savings rates over the past year.

A pending “consumption crunch” for Australian consumers forms part of a negative economic backdrop which Morgan Stanley expects will weigh on bank earnings in 2018 and 2019.

“We have a negative stance on the banks given a challenging outlook for 2018-19 with a weaker domestic economic cycle, re-emerging headwinds to margins, fundamental change in the mortgage market, increased political and regulatory scrutiny, and an increase in non housing loss rates,” Morgan Stanley said.

Westpac is the only major bank in which Morgan Stanley is overweight. It has a neutral weighting on ANZ and is underweight NAB and CBA.

“Relative to peers, Westpac is a bigger beneficiary of loan repricing, has a lower credit risk profile, and offers better risk / reward at current multiples, so it is our preferred major bank,” Morgan Stanley said.

Time to Haggle

From The Real Estate Conversation.

It pays to haggle on your mortgage. Mystery shopping by mortgage comparison site Mozo has found that the Big Four banks are offering discounts of up to 0.82 per cent to customers who ask for a better deal.

Haggling for a better rate on your mortgage could save you hundreds of thousands of dollars over the life of your loan.

Mystery shoppers from online mortgage comparison site, Mozo, have found that the Big Four banks are offering discounts of up to 0.82 per cent to those who ask for a better rate on their loan.

And that’s not all. Some banks are offering incentives such as cashbacks and frequent flyer points to borrowers.

Mozo staff posing as first homebuyers, investors and refinancers asked for discounts at each of the Big Four banks. The potential savings they found were significant: a homebuyer had the potential to save $45,000 over the life of their loan, and a refinancer could save up to $86,000.

“We urge you to haggle,” said Mozo Property Expert, Steve Jovcevski.

“All four big banks were prepared to move on interest rates when pushed, even for investors,” he said.

In 2015, the mystery shoppers who posed as investors weren’t offered any discounts, he said.

“Given APRA’s recent clamp down on interest only loans allowing no more than 30 per cent of new residential mortgage loans to be interest only, we are surprised to see that banks are offering such competitive rates to potential investors,” said Jovcevski.

The survey found that the Commonwealth Bank offered the most competitive rates for first-home buyers, refinancers and investors. The Mozo mystery shoppers said the bank was ‘very keen’ to give a discount.

Mozo home loan mystery shop discounts

Source: Mozo.

  • For refinancers, discounts from 4.62% to 3.80% were on offer, equating to $2,873 in savings each year on a $500,000 loan.
  • For first-home buyers, a discount of 4.72% down to 4.00% resulted in a savings of $1,527 per year on a $300,000 loan.
  • For investors, the discount from 5.54% down to 4.82% results in a whopping $7,200 in savings per year on a $1,000,000 loan.

Westpac was the hardest of the Big Four to negotiate with. It only offered to price-match rates from other banks.

Ask, and you shall receive, says Mozo.

ASIC update on interest-only home loans

ASIC today provided an update on its targeted review of interest only home loans. They say that borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender and borrowers approaching retirement age continue to be provided with a  significant number of  interest-only owner-occupier loans.

ASIC will now look at individual loan files, especially from lenders with high IO portfolios, in the light of the responsible lending provisions.

Announced in April 2017, the review was a targeted industry surveillance examining whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans.

With many lenders, including major lenders, charging higher interest rates for interest-only loans compared with principal-and-interest loans, lenders and brokers must ensure that consumers are not provided with unsuitable interest-only home loans.

ASIC has concluded the first stage of its targeted review, which involved data collection from 16 home loan providers (including large banks, mid-tier and smaller banks, and non-bank lenders).

ASIC found that Australia’s major banks have cut back their interest-only lending by $4.5 billion over the past year. However, other lenders have partially offset this decline by increasing their share of interest-only lending.

The 16 lenders reviewed by ASIC provided $14.3 billion in interest-only loans to owner-occupiers in the June 2017 quarter, down from $19 billion in the September 2015 quarter.

ASIC’s interest-only lending review has also found:

  • Borrowers who used brokers were more likely to obtain an interest-only loan compared to those who went directly to a lender
  • Borrowers approaching retirement age continue to be provided with a  significant number of  interest-only owner-occupier loans

ASIC has now moved into the second stage of its review, and will be reviewing individual loan files from both lenders and mortgage brokers. These lenders and mortgage brokers have been selected based on a number of criteria, including their relative share of interest-only home lending.

ASIC will examine individual loan files to ensure that lenders are providing interest-only home loans in appropriate circumstances. ASIC will carefully review cases where owner-occupiers have been provided with more expensive interest-only home loans, to ensure that consumers are not paying for more expensive products that are unsuitable.

Under the responsible lending obligations, lenders and brokers are required to make sure that a loan meets the requirements and objectives of a consumer, in addition to making sure that the loan is affordable. Lenders and brokers must have a reasonable basis for suggesting that a consumer apply for a particular loan product, and no consumer should be surprised by the type of home loan product that they have obtained.

In providing the update, ASIC Deputy Chair Peter Kell said he expected lenders offering these types of loans to be making thorough enquiries into the financial status and the needs of their clients:

“The spotlight has been firmly on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their legal obligations,” he said.

“While interest-only loans may be a reasonable option for some borrowers, lenders must make appropriate enquiries into the needs and financial circumstances of their customers, and they must be able to demonstrate that they have done so.”

ASIC will consider appropriate enforcement action if breaches of the law are identified.

Background

ASIC collected data from the following lenders covering their interest-only lending activities over the last two years:

  • Australia and New Zealand Banking Group Limited
  • Australian Central Credit Union Ltd (trading as People’s Choice Credit Union)
  • Bank of Queensland Limited
  • Bendigo and Adelaide Bank Limited
  • Citigroup Pty Limited
  • Commonwealth Bank of Australia
  • ING Bank (Australia) Limited
  • La Trobe Financial Services Pty Limited
  • Liberty Financial Pty Ltd
  • Macquarie Bank Limited
  • Members Equity Bank Limited
  • National Australia Bank Limited
  • Pepper Group Limited
  • Suncorp-Metway Limited
  • Teachers Mutual Bank Limited
  • Westpac Banking Corporation

ASIC has provided guidance to industry in Regulatory Guide 209 Credit licensing: Responsible lending conduct (refer: RG 209).

In 2015, ASIC reviewed interest-only loans provided by 11 lenders and issued REP 445 Review of interest-only home loans (refer: REP 445), which made a number of recommendations for lenders to comply with their responsible lending obligations (refer: 15-297MR).

In 2016, ASIC reviewed the practices of 11 large mortgage brokers and released REP 493 Review of interest-only home loans: Mortgage brokers’ inquiries into consumers’ requirements and objectives (refer: REP 493). REP 493 identified good practices as well as opportunities to improve brokers’ practices.

Responsible lending is a key priority for ASIC in its regulation of the consumer credit industry. ASIC’s targeted surveillance of interest-only lending follows considerable regulatory activity focused on responsible lending compliance:

  • Treasury releases ASIC’s Review of Mortgage Broker Remuneration.
  • ASIC announces further measures to promote responsible lending in the home loan sector (refer: 17-095MR).
  • ASIC filed civil penalty proceedings against Westpac in the Federal Court on 1 March 2017 for alleged breaches of the National Consumer Credit Protection Act 2009 (refer: 17-048MR).

Borrowers with concerns about their ability to make home loan repayments should contact their lender in the first instance. ASIC’s MoneySmart website has guidance for consumers who are having problems paying their mortgage, including how to approach their lender. They can also access free external dispute resolution, through either the Financial Ombudsman Service or Credit and Investments Ombudsman.

Residential Construction Rotates

The latest data from the ABS shows building construction activity to June 2017. We see a small rotation towards non-residential work, supported by investment from the public sector. The trend estimates, which irons out the bumps in the series, shows a rise in total building work done, with a fall in residential building of 1.2% and a rise in non-residential building of 2.8%.

Within the residential data, new houses fell 1.3% and other new residential building fell 1.0%.

The trend estimate of the value of total building work done rose 0.3% in the June 2017 quarter.

The trend estimate of the value of new residential building work done fell 1.2% in the June quarter. The value of work done on new houses fell 1.3% while new other residential building fell 1.0%.

The trend estimate of the value of non-residential building work done rose 2.8% in the June quarter.

The trend estimate for the total number of dwelling units commenced fell 3.0% in the June 2017 quarter following a fall of 2.8% in the March quarter.

The trend estimate for new private sector house commencements fell 1.6% in the June quarter following a fall of 2.7% in the March quarter.

The trend estimate for new private sector other residential building commencements fell 4.6% in the June quarter following a fall of 3.0% in the March quarter.

CBA To Launch New Low Rate Credit Card

Commonwealth Bank today has announced three new initiatives including a new credit card with an interest rate below 10 per cent.

The three initiatives are:

  1. A new credit card with a 9.90 per cent purchase interest rate
  2. All customers with a credit card can receive real-time alerts for credit card repayments and high cost transactions, and all transaction account customers can receive overdrawn account alerts
  3. All credit card customers will have access to an instalment feature designed to help them pay down existing balances or large purchases, in easy fixed instalments

Clive van Horen, Executive General Manager at Commonwealth Bank, said: “We’ve heard feedback from customers and consumer groups and understand there’s a need to offer a greater range of affordable and easy to manage products.”

Designed to give customers more visibility and control over their personal finances, the new credit card, real-time alerts, and instalment feature will launch in phases.

“We know there’s strong demand for a simple credit card option and we also recognise we need to help our customers avoid credit card late payment and overdrawn account fees. The real-time alerts in our CommBank App give customers even more tools to help manage their spending and avoid fees and charges,” said Mr van Horen.

New credit card

Available from early 2018, the new CommBank credit card will offer a highly competitive interest rate of 9.90 per cent, and a low account keeping fee of just $5 per month. The new credit card is suited to customers who want a low, competitive interest rate, low account keeping fee with a low maximum limit, and no access to cash advances.

Real-time alerts for credit card repayments, overdrawn accounts and high cost transactions

From November, customers will be able to take advantage of three new alerts:

  • Customers with the CommBank App will receive real-time alerts, reminding them their credit card payment is due. If their payment becomes overdue, customers will receive an additional alert advising them if they make their payment by midnight the following day they will not incur a late payment fee.
  • Customers whose transaction accounts have been overdrawn due to a scheduled payment or direct debit will receive a real-time alert and they too will not incur an overdrawn access fee if settled by midnight.
  • Customers that make a high cost credit card transaction (such as an ATM cash advance or online gambling) will be alerted in real time that these transactions incur cash advance fees and interest.

Instalment feature

From mid-2018, credit card customers can choose to pay down large purchases or a portion of their balance through fixed monthly instalments at a discounted rate, over a fixed period, allowing them greater control of their credit card repayments.

Empowering customers to manage their spending and avoid fees and charges

These latest product initiatives join the suite of online tools and features launched over the last three years to give customers more visibility over their credit card spending, including:

  • Transaction Notifications: Eligible customers automatically receive an instant notification every time they pay with their credit card.
  • Lock, Block, Limit: Gives customers real-time control over what types of transactions their card could be used for – such as ATM withdrawals and overseas spending. More than 1 million cards have enrolled for this feature since 2014.
  • Spending cap and credit limit decreases: Customers can set a spending cap to manage their spending or reduce their credit limit online. Approximately 13,000 credit limit decreases are performed each month since launch.
  • Spend Tracker: Each credit card transaction is categorised automatically in the CommBank App so customers can see where they are spending and compare expenditure across months.
  • Earlier this year CommBank also launched Click to Close: a feature which allows customers to close their credit cards online through NetBank and the CommBank App.

“We continue to innovate for our customers’ benefit and we hope these latest steps will be welcomed,” added Mr van Horen.

Does past inflation predict the future?

Interesting Analytical Note from the Reserve Bank New Zealand. They have recently changed their modelling of inflation, preferring to use past data rather than a two year prediction because despite low unemployment, inflation has remained lower than would be expected on the old method. This suggests monetary policy needs to be more stimulatory than expected .

Forecasts of non-tradables inflation have been produced using Phillips curves, where capacity pressure and inflation expectations have been the key drivers. The Bank had previously used the survey of 2-year ahead inflation expectations in its Phillips curve. However, from 2014 non-tradables inflation was weaker than the survey and estimates of capacity pressure suggested. Bank research indicated the weakness in non-tradables inflation may have been linked to low past inflation and its impact on pricing behaviour.

This note evaluates whether measures of past inflation could have been used to produce forecasts of inflation that would have been more accurate than using surveys of inflation expectations. It does this by comparing forecasts for annual non-tradables inflation one year ahead. Forecasts are produced using Phillips curves that incorporate measures of past inflation or surveys of inflation expectations, and other information available at the time of each Monetary Policy Statement (MPS). This empirical test aims to determine the approach that captures pricing behaviour best, highlighting which may be best for forecasting going forward.

The results show that forecasts constructed using measures of past inflation have been more accurate than using survey measures of inflation expectations, including the 2-year ahead survey measure previously used by the Bank. In addition, forecasts constructed using measures of past inflation would have been significantly more accurate than the Bank’s MPS forecasts since 2009, and only slightly worse than these forecasts before the global financial crisis (GFC). The consistency of forecasts using past-inflation measures reduces the concern that this approach is only accurate when inflation is low, and suggests it may be a reasonable approach to forecasting non-tradables inflation generally.

From late 2015, the Bank has assumed that past inflation has affected domestic price-setting behaviour more than previously. As a result, monetary policy has needed to be more stimulatory than would otherwise be the case. This price-setting behaviour is assumed to persist, and is consistent with subdued non-tradables inflation and low nominal wage inflation in 2017.

Figure 6 shows the average 1-year ahead forecast of non-tradables inflation for the measures of past inflation and surveys of inflation expectations. The range of forecasts produced by the models is currently large relative to history, perhaps reflecting differences between the surveys of inflation expectations and measures of past inflation. The two most accurate measures (shown by the red lines) suggest non-tradables inflation will be between 2.5 and 3 percent in 2018 – similar to the forecast in the August 2017 MPS and only a little higher than the latest outturn of 2.4 percent in the June quarter 2017.

Conclusion

Non-tradable inflation has been surprisingly weak since 2014. Phillips curves with the survey of 2-year ahead inflation expectations suggest non-tradables inflation should have risen by more than we have seen, given the level of the unemployment rate and the Bank’s estimates of the output gap. This note shows that using measures of past CPI inflation instead of surveyed inflation expectations would have produced more accurate forecasts of non-tradables inflation, although not all of the weakness in non-tradables inflation would have been predicted.

The Bank has adjusted its forecasting models to better capture the role of past inflation, moving away from using the survey of 2-year ahead inflation expectations to underpin its forecasts

The Analytical Note series encompasses a range of types of background papers prepared by Reserve Bank staff. Unless otherwise stated, views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank.

Global Economic Upswing Creates a Window of Opportunity – IMF

From the IMF Blog.

The global recovery is continuing, and at a faster pace. The picture is very different from early last year, when the world economy faced faltering growth and financial market turbulence. We see an accelerating cyclical upswing boosting Europe, China, Japan, and the United States, as well as emerging Asia.

The latest World Economic Outlook has therefore upgraded its global growth projections to 3.6 percent for this year and 3.7 percent for next—in both cases 0.1 percentage point above our previous forecasts, and well above 2016’s global growth rate of 3.2 percent, which was the lowest since the global financial crisis.

For 2017, most of our upgrade owes to brighter prospects for the advanced economies, whereas for 2018’s positive revision, emerging market and developing economies play a relatively bigger role. Notably, we expect sub-Saharan Africa, where growth in per capita incomes has on average stalled for the past two years, to improve overall in 2018.

The current global acceleration is also notable because it is broad-based—more so than at any time since the start of this decade. This breadth offers a global environment of opportunity for ambitious policies that will support growth and raise economic resilience in the future. Policymakers should seize the moment: the recovery is still incomplete in important respects, and the window for action the current cyclical upswing offers will not be open forever.

Global recovery still incomplete

Why do we say that the recovery is incomplete? It is incomplete in three important ways.

First, the recovery is incomplete within countries. Even as output nears potential in advanced economies, nominal and real wage growth have remained low. This wage sluggishness follows many years during which median real incomes grew much more slowly than incomes at the top, or even stagnated. Drivers of growth including technological advances and trade have had uneven effects, lifting some up but leaving others behind in the face of structural transformation. The resulting higher income and wealth inequalities have helped fuel political disenchantment and skepticism about the gains from globalization, putting recovery at risk.

Second, the recovery is incomplete across countries. While most of the world is sharing in the current upswing, emerging market and low-income commodity exporters, especially energy exporters, continue to face challenges, as do several countries experiencing civil or political unrest, mostly in the Middle East, North and sub-Saharan Africa, and Latin America. Many small states have been struggling. About a quarter of all countries saw negative per capita income growth in 2016, and despite the current upswing, nearly a fifth of them are projected to do the same in 2017.

Finally, the recovery is incomplete over time. The cyclical upswing masks much more subdued longer-run trends of productivity and demographics, even correcting for the arithmetical effect of more slowly growing populations. For advanced economies, per capita output growth is now projected to average only 1.4 percent a year during 2017–22 compared with 2.2 percent a year during 1996–2005. Moreover, we project that fully 43 emerging market and developing economies will grow even less in per capita terms than the advanced economies over the coming five years. These economies are diverging rather than converging, going against the more benign trend of declining inequality between countries due to rapid growth in dynamic emerging markets such as China and India.

Window for action

These gaps in the recovery challenge policymakers to action—action that should take place now, while times are good. Success requires a three-pronged approach in the context of completing and refining the important financial stability reforms undertaken since the global crisis, without weakening them.

Needed structural reforms differ across countries, but all have ample room for measures that raise economic resilience along with potential output. Our research has shown that structural reforms are easier to implement when the economy is strong.

For some countries that have returned close to full employment, the time has come to think about gradual fiscal consolidation to reduce swollen public debt levels and build buffers against the next recession. Higher infrastructure and educational spending, which are needed in some countries that do have fiscal space, can have the added benefit of boosting global demand just as consolidation measures elsewhere subtract from it. This multilateral fiscal policy mix can also help reduce excess global imbalances.

Critically important to growth that can be sustained and shared by all is investment in people at all life cycle stages, but especially the young. Better education, training, and retraining can both ease labor market adjustment to long-term economic transformation—from all sources, not only trade—and raise productivity. In the short term, the excessive youth unemployment that afflicts many countries urgently deserves attention. Investing in human capital should also help push labor’s income share upward, contrary to the broad trend of recent decades—but governments should also consider correcting distortions that may have reduced workers’ bargaining power excessively.

In sum, structural and fiscal policy together should promote economic conditions conducive to sustainable and more inclusive real wage growth.

The third policy prong, monetary policy, still has a key role to play. Earlier deflation threats in advanced economies have receded considerably, but inflation has remained puzzlingly low even as unemployment rates have come down. Clear central bank communication and the smooth execution of monetary policy normalization, where and when appropriate, remain crucial. Success will help prevent market turbulence and sudden tightening of financial conditions, which could disrupt the recovery with spillovers to emerging market and developing economies. Those economies, in turn, face diverse monetary policy challenges but should continue where possible to use exchange rate flexibility as a buffer against external shocks, paying due attention to implications for price stability.

Numerous global problems require multilateral action. Priorities for mutually beneficial cooperation include strengthening the global trading system, further improving financial regulation, enhancing the global financial safety net, reducing international tax avoidance, and fighting famine and infectious diseases.  Also crucially important are to mitigate greenhouse gas emissions before they do more irreversible damage, and to help poorer countries—which are not themselves substantial emitters—adapt to climate change.

If the strength of the current upswing makes the moment ideal for domestic reforms, its breadth makes multilateral cooperation opportune. Policymakers should act while the window of opportunity is open.