While economic growth slowed in the three months to June, don’t expect any move from the Reserve Bank to cut interest rates, despite what the odd urger might call for or suggest through a tame mouthpiece in the media or business.
RBA governor Glenn Stevens made it clear yesterday in a speech that he saw added risk in doing that, especially with the housing boom well alight.
The Australian Bureau of Statistics reported that economic growth slowed to 0.5% in the three months to June, down from the unrevised 1.1% rate in the first quarter and for an annual rate for the 2013-14 financial year of 3.1%, up sharply from the 2.3% a year earlier and better than the 2.8% in calendar 2013.
But that wasn’t ‘new’ news – we’ve known for over a month that net exports would have a negative impact on growth, as would the slowing mining boom and weak government spending.
But manufacturing, tourism and food services and home building played a part in boosting growth, as did a strong rise in business inventories which represented companies, especially in mining and manufacturing, rebuilding stocks they had run down sharply in the first three months.
All in all it was just what the RBA and governor Glenn Stevens had been telling us would happen after the strong growth of the March quarter.
But in a speech in Adelaide yesterday Mr Stevens mentioned the weaker growth, but concentrated much of the speech on his latest bugbear, the growing risks in the housing sector.
Mr Stevens made it clear the bank would not be doing anything to add more stimulus to the economy.
Why? Well he and quite a few other senior people in business and regulators are becoming worried about the surge in house prices in markets such as Sydney and Melbourne.
Mr Stevens comments yesterday about risk and monetary policy echoed the sentiments in a speech on Tuesday night by ANZ Bank governor David Gonski who pointed out that the house price boom can’t go on. Bluntly he said "The fact is, anyone who believes prices always go up is, I think, a fool."
That’s also a sentiment Mr Stevens expressed before, especially about Sydney property.
He said in his speech in Adelaide yesterday that monetary policy aimed at encouraging business investment and generating employment amid global economic weakness was in danger of creating a housing bubble in Australia.
"As for things that monetary policy should try to avoid, we are also cognisant of the fact that monetary policy does work initially by affecting financial risk-taking behaviour," Mr Stevens said.
"In our efforts to stimulate growth in the real economy, we don’t want to foster too much build-up of risk in the financial sector, such that people are over-extended.
"That could leave the economy exposed to nasty shocks in the future.
"The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle.
"It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that,” he said.
In July Mr Stevens said in an update on the economy given in Hobart that, “People should not assume that (house) prices always rise. They don’t; sometimes they fall," and that "banks and other lenders need to maintain strong lending standards."
And if they don’t? Well, as he told the House of Representatives Economics Committee last month, "I think the next step is to then press through the supervisory mechanism for the lenders to know who they are lending to, take care, keep giving the message about leverage and take a close look at standards of lending.
"APRA already has been communicating with banks about those types of issues, and I imagine we can probably step up that scrutiny and make it a little bit more targeted if it is appropriate to do so over time.
"The strongest step would be the dreaded macro prudential tools—they are the latest fad, internationally. And I have said that I do not rule out the use of those or asking if APRA will use them, if needed. That would remain on the table as a possibility as well."
So remember, rate cuts are out, and yesterday’s GDP report tells us that a rate rise is somewhere off in the distance, a way away and not even on the RBA’s radar. But cooling the housing sector certainly is.
