The Reserve Bank of Australia meet next week, Tuesday 4 July
The announcement of their decision comes at 2.30pm Sydney time, which is 0430GMT.
- There will be a statement (there always is) from Governor Lowe to accompany the decision
- There is no press conference (there never is)
Right then, what to expect?
In a nutshell, no change to policy is expected. But there is a raised likelihood of a more 'hawkish' accompanying statement. The Bank has been neutral but with the shift in tone from other central banks and more signs of improvement for the Australian economy (especially employment data) the risk is rising that the RBA leans more hawkish. Indeed, Deutsche Bank were out with a note to client yesterday along these lines, saying to expect a surprise from the Bank.
Here is a summary of a UBS note on what to expect from RBA on Tuesday (bolding mine):
- Overall, with the RBA still expecting CPI to only increase gradually, and Q1 real GDP slowing to 1.7% y/y, the weakest since the GFC - dragged by record low nominal household income - this strongly argues against an RBA rate hike cycle near-term.
More detail:
- Indeed, households have never been more sensitive to higher rates, with household debt-income one of the highest in the world at ~190%.
- Increasing leverage mainly reflects lower rates being capitalised into a record house price-income ratio.
- In the past, hiking cycles caused the price-income ratio to retrace, but with most of the adjustment via income growing faster than prices. However, in this cycle, given weak income, more of the adjustment would likely come via outright falls in prices. This could then stall or even reverse the household wealth effect which added ~1%pt y/y to nominal consumption growth in the last few years, via a persistent drop in the household savings rate.
And, this:
- The RBA still clearly has the most influence over monetary policy in Australia, with the ability to influence borrowing rates via changes in the cash rate. However, longer term, the 'structural' widening of borrowing rates vs the RBA - combined with record leverage - argues that the long-run 'neutral' cash rate in Australia is likely now around 2 3⁄4% (and potentially lower in the future if repricing continues). This is below our previous estimate of ~3%
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There is a good bit more the UBS note, its provocatively titled: Are the Major Banks setting RBA monetary policy?
In summary, UBS argue that:
- The Australian monetary policy regime is shifting. Historically, the almost single driver of monetary policy settings in Australia was the RBA's cash rate... Indeed, there used to be a very strong causality of RBA cash rate moves with borrowing rates. With 85-90% of mortgages on variable rates, the monetary policy transmission mechanism had an almost immediate impact on both the flow of new loan demand, as well as a cash-flow impact on existing borrowers (as banks would also quickly 'reprice' the 'back-book').
- However, since the GFC there has been a material widening in the spread on the actual economy-wide weighted average private sector borrowing rate, relative to the RBA's cash rate. We estimate this gap has doubled since 2007 towards 350bp, the largest spread since 1994. Despite this, the multi-decade downtrend of the RBA cash rate to a record low of 1.5% had also seen average borrowing rates drop to under 5%. This previously provided a prolonged and cyclical boost to the economy via ever increasing leverage, mainly as lower interest rates were capitalised into higher house prices.
- However, regulators (led by APRA) have become increasingly concerned about housing risks ... Reflecting this, regulators have effectively implemented two 'phases' of macroprudential policy tightening. Firstly in Dec-14 APRA announced a cap on investor housing credit growth of 10% y/y ... Secondly, in Mar-17 APRA announced a limit on the flow of new home loans on interest-only (IO) terms at a 30% share, which is below the current 40% .... Looking forward, it seems unlikely regulators will quickly reverse course. Instead, it appears likely monetary policy will continue to target housing through macroprudential measures, rather than the RBA using the blunt tool of cash rate hikes.
