The RBA minutes for November do not tell us much that is new, other than confirming again the categorisation of loans by the banks is likely to continue, and monetary settings are considered to be accommodative, despite recent mortgage rate hikes.
The major banks in Australia continued to raise equity to meet the changes to minimum capital requirements announced by APRA around mid year, which would take effect from July 2016. Equity as a source of funding for banks had increased by around ½ percentage point to 8 per cent of total funding. The largest banks had increased standard variable housing rates in October by 15–20 basis points. Members noted that widening margins on mortgage lending were in part offsetting lower margins on lending to larger businesses, for which lending rates had continued to decline in the face of strong competition. Deposit rates had been lowered and funding costs more generally had declined.
Over the course of 2015 to date, Australian financial institutions had made substantial revisions to the data used to categorise housing, business and personal credit. The revisions were particularly large for the split of housing credit between owner-occupation and investment, with the share of housing credit extended to investors revised from 35 to 40 per cent. More recently, as a result of the increase in lending rates to investors in housing, a significant amount of housing lending had been reclassified from investment to owner-occupation. Further switching was expected in coming months. The revisions had resulted in discrete breaks in the level of the two components of housing credit, complicating the assessment of the rate of growth in these two components. Members noted that the stock of total lending for housing as well as its growth rate were not materially affected by the revisions.
At the time of the meeting, pricing in financial markets reflected around a 50–50 expectation of a reduction in the cash rate at the present meeting.
Considerations for Monetary Policy
In considering the stance of monetary policy in Australia, members noted that the global economy was expanding at a moderate pace, with some further softening in conditions in the Asian region, continuing growth in the United States and a recovery in Europe. The slowdown in Asia had been more persistent than earlier anticipated and had contributed to lower commodity prices, along with increased supply of commodities, including from Australia. The terms of trade for Australia had declined further. Monetary policy was accommodative in many economies and the low level of oil prices was expected to support growth in Australia’s major trading partners over the next few years. Inflation rates remained low and below central banks’ targets.
Members noted that recent data on economic activity in Australia suggested that the moderate economic expansion had continued. The very low level of interest rates was supporting growth in household consumption and dwelling investment. In addition, the Australian dollar was adjusting to the significant declines in key commodity prices and boosting demand for domestic production. This had been most evident in the services sector, which had experienced strong employment growth over the past year. While measures of non-mining investment intentions had remained subdued, surveys of business conditions had strengthened to above-average levels. These factors suggested that the prospects for an improvement in economic conditions had firmed a little over recent months.
Overall, the forecast for the Australian economy remained for growth to strengthen gradually over the next two years as the drag on GDP growth from falling mining investment waned and activity progressively shifted to non-mining sectors of the economy. However, members recognised that there was still evidence of spare capacity, including the relatively high unemployment rate, low wage growth and the lower-than-expected inflation outcome in the September quarter. The gradual nature of the pick-up in domestic growth suggested that spare capacity would persist for some time. Inflation was forecast to be consistent with the target over the next one to two years, but somewhat lower than earlier expected.
In these circumstances, members judged that monetary policy needed to be accommodative. While the recent changes to some lending rates for housing would reduce the support to demand from low interest rates slightly, overall conditions were still accommodative. Credit growth had increased a little over recent months and housing prices had risen further in Melbourne and Sydney, though the pace of growth had moderated and housing prices were steady in other cities. Members noted that supervisory measures were helping to contain risks that may arise from the housing market.
Taking the above information into consideration, members decided that leaving the cash rate unchanged at this meeting was appropriate. They judged that the inflation outlook may afford some scope for further easing of monetary policy, should that be appropriate to lend support to demand. The Board would continue to assess the outlook, and whether the current stance of policy would most effectively foster sustainable growth and inflation consistent with the target.
