RBA Minutes: Renewed concern around household debt; more confidence on labour market - Westpac

Bill Evans, Research Analyst at Westpac, explains that the minutes of the RBA’s monetary policy meeting on August 1 show a change in the balance of risks on which the Bank is clearly focussed.

Key Quotes

“In August, “members regarded conditions in the housing market and household balance sheets as continuing to warrant careful monitoring”. In addition, the August minutes refer to “the need to balance risks associated with higher household debt in a low inflation environment”.”

“A reasonable conclusion from this change in emphasis is that the Bank is certainly more comfortable with the outlook for the labour market - “indicators of labour demand have pointed to further employment growth”, and by the end of the forecast period, “the unemployment rate was expected to be just below 5 ½ per cent, slightly lower than forecast in May”.”

“There was also the hint of more confidence around a lift in wage inflation, “information from liaison indicated that some employers were finding it harder to attract workers with particular skills”.”

“On the other hand, commentary around inflation seemed to be more downbeat. In particular, it was pointed out that” the Australian Bureau of Statistics intends to update the weights in the CPI in the December quarter 2017 CPI release … this was expected to lead to lower reported CPI inflation because the weights of items whose prices have fallen were likely to be higher”.”

“While we can be extremely confident about the three latter dampening factors, the expectation of rising wages is tenuous. Even the minutes refer to international experience where labour markets with much less spare capacity than Australia have been unable to generate wage pressures.”

“The minutes highlight household balance sheets as warranting careful monitoring. It is pointed out that housing credit growth has been growing at a much faster pace than incomes, exacerbating this imbalance. Whereas the July minutes indicated that the impact of the macroprudential policies were yet to have their full effect, the August minutes do not continue that theme.”

“Sensibly, the Bank has not tried to “jawbone” the Australian Dollar. That can only be effective if the market believes that the Bank is prepared to take some action. Given concerns around household balance sheets and a well-known reluctance to intervene, markets are totally confident that the Bank will not take any action to deal with the high Australian Dollar.”

“We saw in the Statement on Monetary Policy that despite the 3% appreciation in the TWI between May and August, the Bank chose not to adjust its growth and inflation forecasts in 2018 and 2019. However, it now specifically states in the minutes “a further appreciation of the exchange rate would be respected to result in a slower pick-up in inflation and economic activity than currently forecast”. It is our view that the AUD will drift back down to USD 0.76 by the time of the next forecast review (November), so the AUD will not represent a risk to the forecasts. On the other hand, if we are wrong, we should take this comment on face value and expect an even lower forecast for inflation and economic activity.”

“Conclusion

These minutes contained a few more surprises than we had originally expected – a clear lift in confidence around the labour market but a stronger emphasis on the risks associated with household debt. The extensive discussion around inflation also implies less certainty around the current view that inflation will lift through 2018 and 2019.

Key to much of this discussion is around wages growth. This will impact incomes and potential household debt ratios; inflation conditions; and the capacity of the household sector to lift its spending, thereby signalling a better environment for businesses and lifting employment and investment.

Given the evidence overseas, for countries with less spare capacity in their labour markets than Australia, we are much more cautious about the wages outlook and therefore expect that the case for higher rates next year will gradually fade.”