At todays’ meeting, the RBA maintained the official cash rate target at 0.1%. The decision comes off the back of subdued inflation figures for the March 2021 quarter. Annual growth in CPI was 1.1%, below the 2-3% target band needed to tighten labour market conditions and drive wages growth. Despite a swift recovery trend in labour market conditions across Australia through the December quarter, wages growth remained low at 1.4% over the 2020 calendar year. These inflation and wages outcomes reinforce the need for the low cash rate target; likely for years to come.
Despite sluggish performance in these economic indicators, the low cash rate setting has been a major tailwind for upward pressure on housing market values. The CoreLogic Home Value index continued to surge through April. While the monthly growth rate in national dwelling values fell from 2.8% in March to 1.8% in April, the April growth rate was still well above the decade average monthly movement in dwelling values (0.3%). While the RBA may not specifically be concerned with strong acceleration in dwelling values (indeed, higher asset values are considered a key transfer mechanism of monetary policy) there has been consistent messaging that regulators are keeping a close eye on housing lending conditions, and will respond to excessive risk in this space.
Interestingly, todays lending indicator data from the ABS showed the highest monthly increase in finance for investor property purchases since July 2003. A higher level of investor participation could signal an increase in risk taking or speculative activity, as it is owner occupiers who tend to be quicker at paying down debt. But despite the surge in investor lending, the proportional value of investor loans remains well below average levels at just 25.9% of mortgage demand. If speculative activity rises more materially, or lending standards worsen, we could see tighter credit controls implemented by APRA which would likely dampen market activity.
With the cash rate target anticipated to remain unchanged for some time, attention is turning to finer details of accommodative monetary policy. Toward the end of the week, the RBA will release its Statement on Monetary Policy, and Deputy Governor Guy Debelle will give an address on monetary policy during COVID-19. These will provide updated economic forecasts, and potentially guidance around the yield curve control (YCC) policy and the bond purchasing program.