A rates bet as safe as houses

The RBA minutes indicate that the cash rate won’t change anytime soon. The economy is developing as the bank expected but there are clear concerns about the pace of house price growth and developments in China.

In the minutes for its March board meeting, the Reserve Bank said for the second consecutive month that if the “economy was to evolve broadly as expected, then the most prudent course would likely be a period of stability in interest rates”.

On March 7, while speaking before the House of Representatives Standing Committee on Economics, RBA Governor Glenn Stevens reinforced this view, noting that he doesn’t know how long the RBA will leave rates unchanged but we should expect a lengthy period of stability (Future challenges will shake the RBA’s comfort zone, March 7).

Has anything happened since then to change the RBA’s mind? Not really.

The main change is that employment growth was much stronger than expected in February, with employment growth also revised up during 2013. Instead of being dreadfully weak during 2013, the Australian labour market can now be characterised as fairly subdued.

Unfortunately employment growth during February was mostly a mirage. The ABS estimates that sample changes accounted for around 37 per cent of employment growth in February and 29 per cent of the decline in people not in the workforce (Why the jobs figures don’t add up, March 13).

Board members also discussed the recent high-profile announcements of future job losses, compared with the 400,000 to 450,000 people who leave or take up employment each month. They discussed the potential that the extensive coverage of these job losses might affect consumer confidence – which may already be occurring.

On a positive note, the Reserve continues to see increasing evidence that “the expansionary setting of monetary policy was having the desired effects”. Indicators have generally been positive for household spending, housing investment, business conditions and exports – areas which the RBA is relying on to rebalance the economy’s growth drivers.

Housing activity has picked up, with dwelling investment set to rise on the back of widespread growth in building approvals. Housing loans remain at an elevated level – though Stevens admitted during his parliamentary testimony that it would be troubling if housing credit growth expanded much further.

House prices were a central issue at the meeting – and have heated up further recently – with members of the board discussing the experience of other countries where macroprudential policies have been used and their possible application for Australia (The RBA’s radical remedy for souring house prices, March 11). I have advocated in favour of the RBA adopting a Reserve Bank of New Zealand approach to rapid house price growth (A housing policy lesson from New Zealand, February 19)

The exchange rate is still well below its peak during 2013 but has once again returned to a level that the Reserve has previously described as “uncomfortably high”. The exchange rate remains a central concern for the Australian economy but much of the momentum gained through the bank’s tough talk has been lost.

While there must be some concern about conditions in China – and by extension domestic export growth – much of the recent weakness in China came to light after the board meeting took place. This will certainly gain greater emphasis when the RBA meets in April.

The RBA’s direct statements, both in the minutes and at the parliamentary testimony, indicate that rates will not rise at the April board meeting. Indeed the language used by the RBA is so clear that a move at all over the next few months would be considered a significant communications blunder.

The one factor that threatens the RBA’s desire for a sustained period of low interest rates is house price growth. If rapid growth in house prices continues it could potentially threaten the financial stability of the economy and the low interest rate setting. The discussion on macroprudential policies is one to look out for and I wouldn’t be surprised if the introduction of such policies is the next big move by the RBA.