The Reserve Bank of Australia has clarified its stance on the official cash rate, noting that while indicators of financial stress in the household sector remain contained, it warrants “careful monitoring” over the coming months.
In the recently released minutes of the Reserve Bank Board’s monetary policy meeting regarding its latest decision on the cash rate, board members highlighted that housing credit continues to outpace growth in household incomes.
The bank said this suggests the risks associated with the housing market and household balance sheets have been rising, and pointed to recently announced supervisory measures by APRA and ASIC as helping to mitigate these risks by reinforcing prudent lending standards and ensuring loan serviceability is appropriate for current conditions.
“Less reliance on interest-only housing loans was also expected to increase the resilience of household balance sheets,” it said.
However, in saying this, the RBA emphasised that it will take some time to assess fully the effects of the recent pricing changes and the increased supervisory attention.
Referring to its recent Financial Stability Review, the board said that although risks related to household debt and the housing market have increased over the preceding six months, indicators of financial stress in the household sector remain contained.
“Low interest rates and improved lending standards over recent years had been supporting households' ability to service debt, and households on average had continued to build repayment buffers,” it said.
However, members noted during the meeting that some households with home loans appeared to have “little or no buffer” of excess mortgage repayments and could be vulnerable if household income were lower than expected.
“This observation emphasised the importance of realistic assessments of household expenses and prudent lending standards for mitigating risks to both financial stability and macroeconomic outcomes.”
Meanwhile, the board said that headline inflation is expected to pick up over 2017 to be above 2 per cent. However, the rise in underlying inflation is expected to be more gradual; wage growth and broader measures of labour cost pressures remain subdued and competition in the retail sector continue to be strong.
Taking into account the available information, the board judged that holding the stance of monetary policy unchanged would be consistent with sustainable growth in the economy and achieving the inflation target over time.
Overall, the board judged that developments in the labour and housing markets “warrants careful monitoring over coming months”.