RBA – Page 85 – Digital Finance Analytics (DFA) Blog

RBA Highlights Housing Supply Issues And Lending Regulation

The RBA made a statement today to the Inquiry into Affordable Housing. Several points to note:

1. They recognise the high price to income ratio we currently have, but also state that low rates make larger mortgages affordable.

the ratio of housing prices to incomes is at the top of its historical range; but

over time, this has been more than offset by falls in financing costs, so that the typical repayment burden as a share of income is not particularly high. This of course does not rule out affordability problems in particular market segments or for particular types of households.

The recent data from the Economist shows the relative data of prices against average income in different countries.

2. Supply of mortgages is not a constraint

there is no shortage of housing finance in Australia. Housing loan interest rates are currently as low as they have been in a generation, and households are not artificially constrained from borrowing as much as they can reasonably be expected to repay. I have already made the point that perceptions of affordability will differ across different types of households; but, if there is a perceived affordability problem in Australia, it is not due to a lack of finance.

3. There are property supply problems

It is the supply response that determines the extent to which additional demand results in higher prices over time. Our submission highlights that Australia faces a number of longstanding challenges in this area, including regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry. There are also obstacles to affordable housing created by Australia’s unusually low-density urban structure, though this is gradually changing.

4. Lending practice reinforcement and other measures are on the cards

the Bank said in its Financial Stability Review last week that the composition of housing and mortgage market activity is becoming unbalanced. The review also indicated that we are discussing with APRA steps that might be taken to reinforce sound lending practices, particularly for investor finance, though not necessarily limited to that.

I want to emphasise that the banks in Australia are resilient, and mortgage lending in this country has historically been relatively safe. APRA has, however, noted a trend to riskier lending practices, and over the past couple of years has been seeking to temper these through its supervisory activities. There are also broader concerns with the macroeconomic risks associated with excessive speculative activity, since this activity can amplify the property price cycle and increase risks to households.

Our discussions with APRA and other agencies on these matters are ongoing, and there will be more to say about them in due course

Total Housing Lending Hits Another High At $1.39 Trillion – RBA

The monthly Financial Aggregates from the RBA for August are out, and shows yet another growth in housing lending. Total housing credit grew at an annual 6.7%, business credit at 3.2% and personal credit 1.1%. Total housing was $1.39 trillion, and now represents 60.7% of all bank lending, the highest it has ever been. In 1990, housing lending was 23% of all bank lending. The red area chart shows the relative proportion of housing lending, compared with all lending. The difference between the APRA number of $1.28 trillion represents the non-bank sector.

Here is the lending mix data right back to 1990 showing the proportion of the banks books in housing finance, as a total of all lending.

Looking at the mix of housing loans, investment lending makes up 33.9% of all housing lending, it has never been higher. Owner occupied lending was worth $919 billion, and investment lending, $471 billion. These are all seasonally adjusted numbers. The red area chart shows the relative proportion of investment housing lending, compared with all housing lending.

Looking at the relative growth, we see that investment lending grew 0.8% last month, whilst owner occupied loans grew 0.4%, seasonally adjusted.

The 12 month averages, which smooth some of the noise in the data shows strong investment growth, at 9.2%, the strongest for several years, (the all time high was in the credit fueled heights of 2003. when it reach more than 25%). Owner occupied growth was slower at 5.4%, but still the strongest since 2012.

Looking at business lending, we see it falling as a proportion of all lending, to 33%, and worth $760 billion. The red area chart shows the relative proportion of business lending, compared with all lending.

Personal credit (other than housing) fell to 6% of all lending, and worth $142 billion. The red area chart shows the relative proportion of other personal lending, compared with all lending.

Our banks are more and more reliant on housing lending, raising questions about concentration risks, should housing take a negative turn. We encourage the FSI to consider seriously the steps needed to re-balance the equation.

Macroprudential Tools could prove useful – RBA

In a speech in Melbourne, the RBA governor, Glenn Stevens said macroprudential tools could prove useful in helping to control the exuberant housing market. That said, he was still skeptical about their effectiveness.

He made the point that whilst monetary policy can’t solve every problem (i.e. interest rates alone) and there may be a need to take other steps if “at the margins they are helpful,”he didn’t consider macroprudential tools a simple solution to the problem, referred to in yesterdays Stability Review of strong investment lending. A reminder of the latest data, which we discussed recently.

He reiterated his concerns about the risks of investment loans, and highlighted the potential risks later, echoing yesterdays report.

No mention of macroprudential as a fad this time, which I guess is a step in the right direction. The IMF and OECD seem more convinced of the effectiveness of macroprudential. DFA’s view is we need them, and soon, alongside changes to negative gearing, and increased capital buffers.

It is interesting to note that U.S. regulators have announced that large banks will be required to hold more liquid capital to ensure they do not get into difficulty in a downturn. According to Reuters the eight biggest U.S. banks must boost capital levels by a total of $68 billion under these new rules. These rules are stricter than those under Basel III, and the banks have complained they will be put at a competitive disadvantage. They will need to hold tier one assets of 5%.

RBA On Housing Lending in Financial Stability Review

The RBA just released their Financial Stability Review for September 2014. They made a number of comments on Housing Lending, which I have collated in a more digestible form here.

INVESTMENT LENDING

Household credit growth has picked up, almost entirely driven by investor housing credit, which is growing at its fastest pace since late 2007. The willingness of some households to take on more debt, combined with slower growth in incomes, means that the debt-to-income ratio has picked up a little in the past six months. The increase in household risk appetite is most evident in the continued strength of investor activity in the housing market. The momentum in investor housing activity has been concentrated in Sydney and (to a lesser extent) Melbourne. Investor housing loan approvals are almost 90 per cent higher in New South Wales than they were two years ago and are 50 per cent higher over the same period in Victoria. As a share of approvals, both are back around previous peaks. By contrast, the momentum in the owner-occupier market appears to have slowed over the past six months or so, with loan approvals to owner-occupiers little changed. Some potential first home buyers are likely to have been priced out of parts of the market by investors, who typically have higher incomes and are therefore able to bid up prices. The broad-based reduction in grants to first home buyers for established housing since late 2012 has also contributed to reduced demand from these buyers.

Strong investor demand can be a sign of speculative excess, with the risk that additional speculative demand can amplify the cycle in housing prices and increase the potential for prices to fall later. This is particularly the case if that demand is largely based on unrealistic expectations of future price growth, perhaps extrapolated from recent experience. A speculative upswing in demand can also be damaging if it brings forth an increase in construction on a scale that leads to a future overhang of supply. This risk is more likely to arise in particular local markets than at the national level. Nationally, Australia is a long way from an oversupply of housing and some increase in supply is to be expected in response to higher prices, which should also help to temper those rising prices.

CREDIT GROWTH

Growth in banks’ domestic lending has lifted over the past six months, after a few years of modest growth (Graph 2.5). Housing credit expanded at an annualised rate of around 7 per cent over the six months to July 2014; growth in investor credit continued to strengthen and at nearly 10 per cent reached its fastest pace since 2007, well above the rate for owner-occupiers. Business credit growth also picked up, although it continues to be weighed upon by subdued non-mining business investment. The pick-up in credit growth has been accompanied by stronger price competition in some loan markets. The ongoing improvement in bank funding conditions, including for smaller banks, has aided price competition. It will be important for banks’ own risk management and, in turn, financial stability that they do not respond to revenue pressures by loosening lending standards, or making ill-considered moves into new markets or products. Banks need to ensure that loans originated in the current environment can still be serviced by borrowers in less favourable circumstances – for instance, at higher interest rates or during a period of weaker economic conditions. Furthermore, banks should be cautious in their property valuations, and conscious that extending loans at constant loan-to valuation ratios (LVRs) can be riskier when property prices are rising strongly, as is currently the case in some commercial property and housing markets.

MORTGAGE COMPETITION

In the residential mortgage market, price competition for new borrowers has intensified. Fixed rates have been lowered in recent months. According to industry liaison, a number of lenders have also extended larger discounts on their advertised variable rates and broadened the range of borrowers that receive these discounts. Banks are offering other incentives to attract new borrowers, including fee waivers, upfront cash bonuses or vouchers. In addition, some banks recently raised their commission rates paid to mortgage brokers. However, reports from banks and other mortgage market participants suggest that, in aggregate, banks’ non-price lending standards, such as loan serviceability and deposit criteria, have remained broadly steady over recent quarters. This seems to be supported by APRA data on the composition of banks’ housing loan approvals, which suggest that the overall risk profile of new housing lending has not increased. It is noteworthy that the industry-wide share of ‘low-doc’ lending continues to represent less than 1 per cent of loan approvals, while the share of loans approved with an LVR greater than 90 per cent has fallen over the past year (see ‘Household and Business Finances’ chapter). That said, strong investor activity in the housing market has meant that the share of investor loans approved with LVRs between 80 per cent and 90 per cent has risen.

INTEREST ONLY LOANS

The shares of interest-only loans for both investors and owner-occupiers have also drifted higher, and average loan sizes (relative to average income) have increased. The increase in interest-only share of banks’ new lending, which has continued to increase for both investors and owner-occupiers in 2014, might be indicative of speculative demand motivating a rising share of housing purchases. Consistent with mortgage interest payments being tax-deductible for investors, the interest-only share of approvals to investors remains substantially higher than to owner-occupiers. According to liaison with banks, the trend in interest-only owner-occupier borrowing has been largely because these loans provide increased flexibility to the borrower. It does not necessarily mean that borrowers are taking on debt that they may not be able to service if both interest and principal repayments are made. Rather, some of these borrowers are likely to be building up buffers in offset accounts. In any case, APRA’s draft Prudential Practice Guide emphasises that a prudent authorised deposit taking institution would assess customers’ ability to service principal and interest payments following the expiry of the interest-only period. More broadly, consumer protection regulations require that lenders do not provide credit products and services that are unsuitable because, for example, the consumer does not have the capacity to meet the repayments.

Future housing loan performance is likely to at least partly depend on labour market performance. Although forward-looking indicators of labour demand have generally improved since last year, they remain consistent with only moderate employment growth in the near term.

LENDING STANDARDS

Although, in aggregate, bank housing lending standards do not appear to have eased lately, a crucial question for both macroeconomic and financial stability is whether lending practices across the banking industry are conservative enough for the current combination of low interest rates, strong housing price growth and higher household indebtedness than in past decades. Moreover, lending to investors is expanding at a fast pace, which could be funding additional speculative activity in the housing market and encourage other (more marginal) borrowers to increase debt. Lending growth is varied across geographical markets and individual lenders, which may suggest a build-up in loan concentrations and therefore correlated risks within the banking industry. The Reserve Bank’s assessment is that the risk from the current strength in housing markets is more likely to be to future household spending than to lenders’ balance sheets. However, the direct risks to banks will rise if current rates of growth in investor lending and housing prices persist, or increase further. In light of the current risks, APRA has increased the focus of its supervision on banks’ housing lending. Specifically, it has:

• begun a regular supervisory survey of a broader range of risk indicators for banks with material housing lending

• released a draft Prudential Practice Guide (PPG) for housing lending that outlined expectations for banks’ risk management frameworks, serviceability assessments, deposit criteria and residential property valuations.1 By way of example, prudent serviceability assessments are seen to involve: an interest rate add-on to the mortgage rate, in conjunction with an interest rate ‘floor’, to ensure the borrower can continue to service the loan if interest rates increase; a buffer above standard measures of household living expenses; and the exclusion, or reduction in value, of uncertain income streams. While much of the guidance in the PPG is already common practice within the industry, it is nonetheless important that practices are not deficient at even a minority of lenders

• written to individual bank boards and chief risk officers asking them to specify how they are monitoring housing loan standards and ensuing risks to the economy

• assessed the resilience of banks’ housing loan (and other) portfolios to large negative macroeconomic shocks, including a severe downturn in the housing market, as part of its regular stress testing of banks’ balance sheets.

In addition, the Reserve Bank is discussing with APRA, and other members of the Council of Financial Regulators (CFR), further steps that might be taken to reinforce sound lending practices, particularly for lending to investors.

PREPAYMENT OF MORTGAGES

The proportion of disposable income required to meet interest payments on household debt has stabilised accordingly, at around 9 per cent. Households continue to take advantage of lower interest rates to pay down their mortgages more quickly than required. The aggregate mortgage buffer – balances in mortgage offset and redraw facilities – has risen to be around 15 per cent of outstanding balances, which is equivalent to more than two years of scheduled repayments at current interest rates. Prepayment rates and the proportion of borrowers ahead of schedule on their mortgage repayments are also high according to liaison with banks. Part of this prepayment behaviour has been due to some banks’ systems not automatically changing customer repayment amounts as interest rates have declined, while in many cases households have not actively sought to reduce their repayments. This might be a sign that household stress is currently limited. The household saving ratio, although trending down a little lately, remains high at just under 10 per cent. Households’ aggregate balance sheet position has continued to improve in recent quarters: real net worth per household is estimated to have increased by 4 per cent over the year to September 2014.

SECURITISATION

One area of shadow banking activity in Australia that warrants particular attention is non-bank securitisation activity, given strengthening investor risk appetite as well as the connections between this activity, the housing market and the banking system (through the various support facilities provided by banks). As discussed, RMBS issuance has picked up since 2013 and spreads have narrowed, including for non-bank issuers (i.e. mortgage originators). Mortgage originators tend to have riskier loan pools than banks; this is partly because they are the only suppliers of non-conforming residential mortgages, which are typically made to borrowers who do not meet the standard underwriting criteria of banks. These originators currently account for about 2 per cent of the Australian mortgage market (not all of which is non-conforming), and so have limited influence on competition in the mortgage market and the housing price cycle. Even so, it is useful to monitor any signs of greater non-bank activity, as this could signal a broader pick-up in risk appetite for housing.

LENDERS MORTGAGE INSURANCE

Lenders mortgage insurers (LMIs) are specialist general insurers that offer protection to banks and other lenders against losses on defaulted mortgages, in return for an insurance premium. LMIs’ profitability improved in the first half of 2014, with the industry posting a return on equity of about 14 per cent, up from an average of around 10 per cent over the preceding few years. The number and average value of claims on LMIs has declined recently in response to the buoyant housing market, as well as previous improvements in underwriting standards. In addition, some LMIs have recently increased their premium rates. In May, the largest LMI, Genworth Australia, successfully listed on the ASX, with around one-third of the company now independently owned. Also, in August QBE announced plans to partially float its subsidiary, which is the other major LMI in Australia. Share market listing will subject the relatively concentrated Australian LMI industry to greater market scrutiny and increase its access to domestic capital markets; such developments could be beneficial to financial stability given the LMI industry’s involvement in the credit creation process and linkages to the banking system.

RBA And Property Speculation

The RBA published the notes from their last meeting today. The theme was similar to previous ones, “Members considered that the most prudent course was likely to be a period of stability in interest rates,” but in the variations, there was a sub-text relating to property prices. I have extracted just those paragraphs:

Members noted that Australian banks continued to report improving asset performance and strong profits, which had contributed to further increases in their capital ratios. Australian banks and non-banks had both benefited from easier wholesale funding conditions globally. This in turn had encouraged stronger competition in lending for housing and to large businesses, but members noted that this had not, to date, led to a general easing in mortgage lending standards and policies. For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and, to a lesser extent, Melbourne.

Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later. The main risks in such a scenario would likely be to the stability of the macroeconomy rather than the financial system, particularly if households were to react to declines in their wealth by cutting back on their spending. Members were also updated on some of the recent actions by the Australian Prudential Regulation Authority in this area.

Members noted that commercial property markets in Australia had also been quite buoyant recently. Australian property had been yielding higher rental returns than were available overseas, which had attracted strong demand from both local and foreign investors. This had boosted prices even though rents for some types of commercial property had declined. In contrast, demand for finance from other parts of the business sector remained subdued, although business credit growth had picked up a little in recent months.

Members noted that the current setting of monetary policy was accommodative. Interest rates remained very low and had declined a little for borrowers since the cash rate was last changed. Investors continued to look for higher returns in response to low rates on safe instruments and were accepting more risk in doing so. Credit growth had picked up, including to businesses. Credit growth for investor housing was running at around 10 per cent per annum. Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation. On the other hand, the exchange rate remained above most estimates of its fundamental value, particularly given the declines in key commodity prices and, overall, had offered less assistance to date than would normally be expected in achieving balanced growth in the economy.

I would tell the story rather different:

Banks have reduced the capital held against their growing pool of mortgage debt, so we hope the new advanced methods of capital calculation will support any risk of a down-turn. Still, the growth in investment lending at 10% is probably not an issue, after all, banks lending standards are just fine, no concerns apparently about the fact that half of new lending in the month was for investment purposes, nor the rise in interest only loans, or loans outside normal approval criteria. House prices continue to rise fast in (some of the cities) but we will just watch what happens, despite all the data showing prices are out of kilter with income, and other measures. Remember that interest rates are at rock bottom, well below the long term trend. They will correct at some point, and when the average mortgage rate is 7%, the chickens are likely to come home to roost. This is the key to potential falling prices later as with income growth below inflation, any lift in rates would have direct macroeconomic effects on borrowing households.

RBA Leaves Rate Unchanged Again!

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Monetary policy remains accommodative. Interest rates are very low and have continued to edge lower over recent months as competition to lend has increased. Investors continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices continues. The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.

RBA Reinforces Current Policy Settings

The RBA has made a supplementary submission to the Financial System Inquiry. Of note, they want to limit the extent to which SMSF’s can borrow, especially for property purchase; acknowledges the potential systemic risk from more housing lending, and the potential impact on business lending; and continues to be skeptical about the potential benefits of macroprudential tools. A couple of contextual charts may help – $1.85 billion in superannuation, 30% in SMSF, and the property sector is worth $5.2 trillion, with borrowing of $1.375 trillion, and a greater proportion for investment purposes, with a rise in interest only loans.

SUPERANNUATION

Assets should be managed in the best interests of members. Measures to lower costs and fees, optimise liquidity management and limit leverage should be considered”. The Bank endorses the observation that leverage by superannuation funds may increase vulnerabilities in the financial system and supports the consideration of limiting leverage. The general absence of leverage in superannuation was a key source of resilience in the Australian financial system during the financial crisis. Furthermore, the compulsory and essential character of retirement savings implies that it should remain largely unlevered. While still in its infancy, the use of leverage by superannuation funds to enhance returns appears to have been mainly taken up by self-managed superannuation funds (SMSFs). The Bank has previously commented on the risks that may arise from geared property investment through SMSFs, which may act as an additional source of demand that exacerbates property price cycles. Nonetheless, some limited leverage for liquidity management purposes may be appropriate.

HOUSING MARKET

The Interim Report finds little evidence of a shortage of mortgage finance in Australia, a view that the Bank shares. Even so, the Interim Report raises a number of options in the context of competition in the mortgage market that, if implemented, could result in relatively more finance being directed towards housing. These options should be assessed in terms of the end benefits and risks for consumers and the broader economy. Relevant considerations include whether the policy change might accelerate household borrowing, and the associated implications for systemic risk and the available funding for Australian businesses. As noted in the Bank’s initial submission, housing is generally not a particularly risky asset, but because of its size, importance to the real economy and interconnectedness with the financial system it poses systemic risk. With regards to Capital Requirements, the Interim Report highlighted several options for aiding competition through Australia’s capital framework, including changes to mortgage risk weights and providing capital inducements for ADIs that use Lenders’ Mortgage Insurance. Because of the cyclical nature of risk-taking and the large social and economic costs of instability in financial systems, it is crucial that institutions’ capital be allocated according to risk. Hence, changes to the capital framework on competitive grounds should not come at the expense of greater risk, and should not amount to a weakening relative to global regulatory minima.

MACROPRUDENTIAL

The Bank concurs with the Interim Report’s caution regarding unproven macroprudential tools. The Bank and the other CFR agencies view macroprudential policy as being subsumed within the broader financial stability policy framework in Australia. The Interim Report notes the existing framework where APRA, in consultation with the Bank and other CFR agencies, is responsible for administering prudential regulation. Consistent with its existing mandate to promote financial stability, APRA has adapted its prudential intensity in light of developments in systemic risk. For example, following signs of increased risk appetite in the mortgage market, APRA recently surveyed mortgage underwriting standards, released guidance on managing mortgage risk, and asked the major banks to specify how they are monitoring lending standards and the ensuing risks to the economy. Tools like loan-to-valuation ratio and debt-servicing ratio limits on mortgages have only recently begun to be used in developed countries. It is still too early to judge their effectiveness with the available evidence so far mixed; the effects of particular initiatives are not easily disentangled from those of other policy settings, including changes in monetary policy. APRA already has the powers to implement these tools if it was decided they would be beneficial. The Bank is not attracted to arrangements whereby prudential policy setting is spread across multiple agencies or groups of agencies. Australian agencies will continue to closely monitor how these tools perform overseas.

Where Capital Growth In Property Lives

In the Opening Statement to House of Representatives Standing Committee on Economics today, Glenn Stevens made the following points:

not only are funding costs low, but banks want to lend and are competing to do so more actively than they have for some years;

net worth per household has risen by about $120,000 over the past two years;

the community’s monetary assets have risen by around 13 per cent – over $180 billion – over the same period;

It is worth reflecting on the fact the main reason for the increase in net worth is a bounce in the stock market, and lift in capital values of property, thanks to rising prices. After all real income is falling for many. In addition, the average hides the differences.

We have been looking at capital growth for the average household, across the states, and between the main urban centres and the rest of rest of the state. From our surveys we have been able to assess the relative growth in the value of property, over time, by marking property to market and comparing that with its purchase price. The chart below shows the relative growth in net capital value of property since 2004 (where our surveys start). It subtracts the original purchase price from the current value, to give a theoretical capital or wealth value. It shows that in the early 2000’s there was a similar level of growth in the cities and regional centres, but that more recently it has diverged. In the past 2 years, the average capital appreciation in the urban centres was $79,000, whereas in the regional centres, it was just $18,000.

However there are significant variations across the states. In Sydney, households in the past 2 years, have on average enjoyed a lift in net worth of more than $230,000 thanks to price hikes, whereas Brisbane, Adelaide, and regional areas in SA and TAS have not experienced much of an increase at all.

Looking at the longer term trends, across states, the situation gets even more interesting. Of course people have bought in at different times, but we can plot the overall capital growth trend. For example, In NSW, a household who bought in Sydney in 2004 and held the property would on average be nearly $300,000 better off now. If they had bought in early 2012, though they could have nearly earnt the same gain! All the action has been in the last couple of years, in Sydney itself. There have been a more gentle lift in regional NSW. Note that I have not corrected for inflation in any of the current calculations, if I did, the regional centres in NSW would have stood still.

In VIC, the situation is somewhat similar. It is worth noting that compared to NSW, the correction in 2009 was less severe.

Turning to QLD, there has been no capital growth in either Brisbane, or the regional centres since 2010. If you were to correct for inflation, it would be going backwards.

In WA, growth peaked in 2010 in Perth, with a further small peak recently, whilst in the regional centres, values are falling in real terms, before inflation. We compared Perth and Sydney recently, in more detail.

Looking at SA, growth in Adelaide is back to 2011 levels, but in the regional areas, growth is still lower than in 2010.

In TAS, since a peak in 2010, both Hobart and regional centres are flat, before inflation.

Finally, we look at the remaining states. Growth in Darwin has been sustained, whilst regional NT and Canberra are flatter since 2011.

So, my conclusion is simple, some households especially in Sydney and Melbourne, may be experiencing the wealth effect halo of smugness, but many households across other states and regional centres are not enjoying capital growth. Indeed, for many there has been a reduction in true value, before inflation since 2011. It is unlikely therefore that we will see a sudden surge of consumer spending activity in response to the housing boom (which is not uniform across the country as we have shown). It is really a Sydney and Melbourne boom. The RBA may be waiting for a long time if they are expecting households to start spending big.

RBA Leaves Rates On Hold – Again

At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.

Monetary policy remains accommodative. Interest rates are very low and for some borrowers have continued to edge lower over recent months. Savers continue to look for higher returns in response to low rates on safe instruments. Credit growth has picked up a little, including most recently to businesses. The increase in dwelling prices has been slower this year than last year, though prices continue to rise. The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy.

Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years.

In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.