RBA ‘confident’ the financial system ‘remains resilient’

The conclusion was drawn by the House of Representatives’ standing committee on economics in its Review of the Reserve Bank of Australia Annual Report 2018.

As part of the committee’s work on scrutinising the Reserve Bank of Australia (RBA) and for ensuring its transparency and accountability to the Parliament, the standing committee heard from the governor of the Reserve Bank, Dr Philip Lowe, and other representatives of the RBA for appearing at a hearing in Sydney on 22 February 2019.

The committee’s report on the hearings has now been released, and concluded that, generally, the central bank is confident in the financial system.

During the hearings, which aim to “bring issues of monetary policy into the public arena” and help inform the financial markets on “the current thinking of the RBA”, Dr Lowe was asked to clarify his stance on interest rates.

Noting that the National Australia Bank had predicted that interest rates were likely to stay the same for the next decade, while Westpac had forecast for there to be two cuts this year, the governor was asked his stance on the matter.

The governor was opaque in his response: “There’s a possibility that rates will need to go up. I think it’s unlikely that that would occur this year, because the inflation outlook looks so benign. But if things turn out broadly along the lines of the central scenario – the unemployment rate comes down and inflation rises, and that happens gradually – then at some point next year, it may well be appropriate to increase interest rates.

“So that’s certainly possible, but it’s also possible that we end up with weaker consumption growth, wage growth doesn’t pick up, the housing adjustment weighs on spending more than we think, and we need to consider lower rates. So, I don’t think either one is right or wrong. Both are possible,” he said.

Dr Lowe did say, however, that the RBA was collecting more data from the banks about interest rates that it hopes will give the RBA a “finer disaggregation of what people are actually paying”. This data is expected to be published later this year.

Given the uncertainty of the interest rate environment, the RBA was asked why it flagged the potential for quantitative easing, to which the deputy governor, Guy Debelle, responded that it was “prudent to look at it from a risk management perspective”; however, it was “highly unlikely” that the Australian economy would be in a situation that would call for it.

He noted that there were other margins of adjustment, including “fiscal policy, the exchange rate and lowering interest rates”, which could be employed in a similar circumstance.

When asked whether consumption growth would be impacted by changes to how retail financial products are sold, as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the governor replied: “If interest rates were to rise, that would have a negative effect on household consumption, but they’ll only rise because of what we did – if household income is growing strongly, the labour market is strong and inflation is increasing.

“If interest rates increase because of a policy decision by the Reserve Bank, it will be in the context of stronger household income growth. That’s not a particular concern. Over the last year or so, a number of banks have raised their mortgage rates by, on average, 10 to 15 basis points, and that’s obviously had some effect, but what is reported less is that competition amongst the banks has picked up.”

In addition, the governor noted that, despite the banks having put up their posted rates, the average rate that Australian households are paying “has hardly moved at all, and that type of change really hasn’t had any effect on household spending”.

The committee noted in its report that the RBA believed that while there are “some wealth effects from declining housing prices”, they were relatively small.

Adding that Sydney and Melbourne prices were still “up 70 or 80 per cent over a decade”, the RBA governor suggested that “most people are sitting on very substantial capital gains”.

“People who purchased in the last year or 18 months are not, but most people are sitting on substantial capital gains, so there are still positive wealth effects coming from that,” he said.

According to the governor, a large part of current housing market adjustment was due to “the big pick-up in population growth in New South Wales” in 2008 causing an undersupply of dwellings.

He explained: “It took the better part of a decade for the rate of home building to respond to that. Prices went up – hardly surprising – but, finally, the supply side did adjust… the rate of home building at the moment is the highest that it’s been in decades, so the rate of addition to the housing stock is very high. And population growth has slowed a bit, so prices are coming down.”

After having considered the RBA’s responses, the committee concluded: “Australia’s economy continues to grow a little above trend with inflation forecast to increase only gradually. The RBA expects GDP to grow to around 3 per cent by the end of 2019, slowing to an increase of 2¾ per cent in 2020 due to slower growth in resource exports. This is being supported by an increase in infrastructure spending and a pick-up in private investment

“The combination of strong growth in jobs, decline in the unemployment rate to 5 per cent, and low level of interest rates is supporting spending. With wages growing at a faster rate than a year ago, boosted by the announced tax cuts, the growth in disposable income is also forecast to increase.”

The chair, Tim Wilson, continued: “Despite the recent housing market adjustment leading to declines in house prices in the major cities, the RBA is confident that the Australian economy and financial system remain resilient, and that lower house prices will open up the market for more people to purchase their own home.”

[Related: RBA insists housing slump won’t ‘derail’ economy]