Interest rates alone will not be the most important part of today’s statement from Reserve Bank Governor, Phil Lowe after the central bank’s May board meeting.
In fact interest rates (no rise is expected) will take a back seat to what Mr Lowe says about housing prices and especially investor lending and interest only loans.
The AMP’s chief economist, Dr Shane Oliver summed up the RBA’s interest rate stance in a weekend note saying the bank “is expected to leave the cash rate on hold at 1.5% for the ninth month in a row.”
“The rise in headline inflation to back within the RBA’s 2-3% target zone has reduced the pressure to cut rates again at a time when the RBA would rather not cut any way given worries about the Sydney and Melbourne property markets, but continuing low underlying inflation pressure at a time of very high underemployment, record low wages growth and a still too high $A means that its way too early to be thinking about raising rates.
“Our base case remains that the RBA will be on hold out to the second half of 2018 when rates will start to rise,” Dr Oliver wrote.
The interest rate decision should be dispensed with quickly before the board moves on to discuss the trickier questions of house prices, household debt, the economy and Friday’s second monetary policy statement of the year.
Figures out yesterday showed house price growth slowed sharply in April, especially in Sydney and Melbourne.
Property consultant CoreLogic said its index of home prices for the combined capital cities rose 0.1 per cent in April, the weakest month-on-month rise since December 2015, compared with 1.4 per cent in March.
Annual growth in overall prices slowed to 11.2%, from 12.9%. House prices in Sydney were flat in April but the annual pace of growth was still a hot 16%. Melbourne prices rose 0.5% last month for an annual rate of 15.3%.
Canberra suffered a fall of 2.8%. Hobart was the strongest housing market, growing at 1% in the month for an annual 13.6% rise.
But the central bank has been concerned at more than surging house prices – there is the impact on consumer finances and on the financial system’s stability.
It has been comments in the post meeting statements from the governor, then the detailed minutes of the past two board meetings which have revealed the sudden rise in regulatory concern about the house price boom in Sydney and Melbourne.
For example in the minutes for the April meeting, the bank said:
"Growth in housing credit continued to outpace growth in household incomes, suggesting that the risks associated with the housing market and household balance sheets had been rising.
"Recently announced supervisory measures were designed to help mitigate these risks by reinforcing prudent lending standards and ensuring that loan serviceability was appropriate for current conditions.
"Less reliance on interest-only housing loans was also expected to increase the resilience of household balance sheets. However, it would take some time to assess fully the effects of the recent pricing changes and the increased supervisory attention.”
And in a summary of the Financial Stability report released in early April said:
"Risks related to household debt and the housing market more generally had increased over the preceding six months. However, the nature of those risks differed across the country, according to the varying conditions and activity in local markets.
"Although credit to the household sector had been growing modestly relative to history, growth had been faster than income growth and the aggregate debt-to-income ratio for households had increased.
"Nevertheless, indicators of financial stress in the household sector remained contained. Low interest rates and improved lending standards over recent years had been supporting households’ ability to service debt, and households on average had continued to build repayment buffers.
“Members noted, however, that some households with home loans appeared to have little or no buffer of excess mortgage repayments and could be vulnerable if household income were lower than expected.”
"This observation emphasised the importance of realistic assessments of household expenses and prudent lending standards for mitigating risks to both financial stability and macroeconomic outcomes.
Dr Lowe is due to make a major speech on the question of house price in Brisbane tomorrow. Entitled Household Debt, Housing Prices and Resilience – Dr Lowe will speak at a lunch of the Economic Society of Queensland.
On Friday the RBA releases its second Monetary Policy Statement of the year which will not only contain new forecasts for economic growth and inflation, but also expand on what will be in tomorrow’s statement from the governor (which will also make reference to the updated forecasts).
