The Reserve Bank of Australia (RBA) sure knows how to get the party started! In its policy statement earlier today, the central bank surprised the markets even as it kept its interest rates steady for another month. What’s up with that?!
Here are four takeaways you need to know about the event:
No policy changes
As many had expected, the RBA kept its interest rates at 1.50% for the seventh month in a row in April.
Apparently, Lowe and his team still believe that “holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
The central bank also maintained its optimism over the global economy, noting that “labour markets have tightened in many countries” and that “conditions in the global economy have improved” even as uncertainties remain. The RBA also noted improvements in commodity prices, which are “providing significant boosts to Australia’s national income.”
Speaking of the motherland, the RBA shared that the economy is still “continuing its transition following the end of the mining investment boom,” so much so that “recent data are consistent with ongoing moderate growth.”
Of course, the RBA also didn’t pass up the opportunity to jawbone its currency. It maintained that while the Aussie’s depreciation since 2013 has assisted the economy’s transition from the mining boom, it also warned that “an appreciating exchange rate would complicate this adjustment.”
RBA high-fived Australia’s housing regulators
Perhaps the most important bit in the RBA’s statement is its notes on the housing market. In an entirely new paragraph, it noted that (emphasis ours):
“Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.”
For trading newbies out there, you should know that market players have been crying “bubble!” over Australia’s housing market lately.
The combination of low-interest rates, Australia’s tax codes, the structure of its mortgage broking industry, and “brisk” increases in house prices have led both potential home-owners and owner-investors to prefer “interest-only” housing loans over other plans.
This trend is problematic for those who are vulnerable to “payment shock” (read: homeowners whose wages aren’t rising) at the end of their interest-only term.
The RBA communicated its concern in its meeting minutes last month, saying that “there had been a build-up of risks associated with the housing market.” Specifically, “growth in household debt had been faster than that in household income.”
Fortunately, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have paid attention.
Just last week, APRA told all banks to cap the annual growth of investor mortgages to 10% AND limit their new interest-only lending to 30% of total new residential mortgage lending.
For reference, interest-only loans currently make up about 40% of all mortgages, with all four major banks well over the 30% limit.
APRA also wants banks to screen their borrowers more stringently by only granting interest-only loans to those who have deposited at least 20% of the principal and have a loan-to-value ratio of more than 90%.
Meanwhile, ASIC, which handles non-bank lenders, has penalized eight major lenders for poor practices and has promised to exercise its regulatory powers to gather data on interest-only lending flows from large and smaller banks, mutual banks, and non-bank lenders.
But back to the RBA. The central bank’s text tells us two things. First, it’s pretty dang happy with the recent curbs in housing loans and expects them to reduce the risks associated with high levels of indebtedness.
Next, its confidence that lenders will use appropriate metrics for their loans and that the housing market will need to rely less on interest-only loans means that it’s expecting lenders to fall in line and make them happen.
The RBA is focusing on other concerns
The only other major change in this month’s statement is the central bank’s notes on employment. In its March statement, the RBA only noted the “mixed” nature of labor market indicators.
But this time around, Lowe and his friends are saying that (emphasis ours):
“…some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest. The various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow.”
Meanwhile, the central bank maintained its dovish view on inflation. Aside from adding that “core inflation remains low” for most countries, it stuck to the belief that while “headline inflation is expected to pick up over the course of 2017 to be above 2 percent,” “the rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued.”
AUD bears attacked
The RBA’s decision to maintain its current policies was widely expected, but its decision to highlight problems in the employment and housing industries was enough to entice currency bears.
Recall that part of the Aussie’s charm in the past few months is Governor Lowe’s suggestions that the RBA is done cutting rates for the time being. He hinted that more rate cuts are hardly “in the national interest,” as they encourage more borrowing and more upward pressure on housing prices.
But with housing regulatory bodies hard at work on containing new, risky loans, the RBA now has room to address issues such as high unemployment and low inflation by cutting its rates.