Higher funding costs treated as a curiosity by RBA

  • By Elizabeth Fry

As expected, the Reserve Bank Board decided on Tuesday to leave the cash rate steady at 1.50 per cent.

The tone of the August Statement remains broadly positive, with the Bank suggesting the Australian economy is unchanged — with GDP growth averaging a bit above 3 per cent through this year and next.

Remarkably, the lift in funding costs continues to be downplayed by the central bank.

In line with the July statement, the RBA noted that funding costs for banks have risen since the start of the year, but added that “they have declined somewhat since the end of June.”

But ANZ’s Felicity Emmet noticed changes to the discussion on funding costs. She pointed out that the Bank now says that “higher money-market rates have not fed through into higher interest rates on retail deposits". 

“Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago," the RBA governor, Philip Lowe, said in the August Statement.

In July,  she noted, the central bank provided little guidance as to the implications of the higher funding costs saying it “ remains to be seen the extent to which these factors persist”. 

No real guidance

Fortunately, says Westpac’s Bill Evans, that sentence has been deleted, but, still, no real guidance is provided in the current statement.

“It is observed that retail deposit rates have not risen and some lenders have increased mortgage rates by small amounts,” Evans said in a note.

“It would have been helpful for the Bank to have given its own view on the sustainability of this move and any implications from the associated tightening in financial conditions.” 

Housing prices “continued to ease” with the RBA now also noting that “nationwide measures of rent inflation remain low”.

In the Statement, the RBA also highlighted the double-pronged credit tightening, noting that “lending standards are also tighter than they were a few years ago, partly reflecting APRA's earlier supervisory measures to help contain the build-up of risk in household balance sheets”. 

It seems to JP Morgan’s Ben Jarman, that the Bank is particularly sanguine on any tightening of financial conditions being imparted by mortgage restrictions. 

Jarman thinks having played a principal role in the credit tightening underway, it is no surprise that RBA officials described the adjustment as a positive that has reduced systemic risks, while downplaying any fallout. 

“So it was again today,” the economist lamented.

The fall in housing credit growth is “largely due to reduced demand by investors as the dynamics of the housing market have changed” 

And, there remains “competition for borrowers of high credit quality”, while “the average mortgage rate paid is lower than a year ago.” 

"The rise in money market rates (a separate phenomenon driven, in our view, by dislocations in repo) is similarly treated as being only a curiosity, in that it has not “fed through into higher interest rates on retail deposits," he said.

“Market rates for mortgage borrowers have indeed been moving up and down depending on the market segment, which is why we have not wanted to give much weight to the idea that the household sector will face 'out of cycle' rate rises on mortgage rates.”

Rather, he went on to say, when the quantity of credit is being reduced the price of credit becomes less important anyway, and so it is the adjustment to lower levels of credit growth over time that will constrain the household sector.