RBA changes discussion on funding costs

Australia’s central bank has held the official cash rate steady at 1.5 per cent with low wage growth, weak consumer prices and tightening credit remaining areas of concern.

Tuesday’s statement from the Reserve Bank of Australia maintained that the global economic expansion is continuing but underlined growing concerns offshore.

"One uncertainty regarding the global outlook stems from the direction of international trade policy in the US," RBA governor Philip Lowe said in the statement.

"There have also been strains in a few emerging market economies, largely for country-specific reasons."

While the governor's commentary on the global economy was  mixed, ANZ economist David Plank reckons the bulk of the RBA’s commentary on the domestic economy is upbeat. 

“The {strong} first quarter GDP result has increased confidence in the outlook. In addition, higher commodity prices have provided a boost to national income recently and the labour market outlook remains positive.” 

Subtle change

Even so, the economist noted some subtle changes to the discussion on funding costs.

In the statement, Lowe acknowledged the rise in Australia’s short-term wholesale interest rates over recent months. 

“This is partly due to developments in the US but there are other factors at work as well. It remains to be seen the extent to which these factors persist,” the central bank head said.

According to Plank, whereas last month the rise in Australian short-term rates was ascribed to conditions in the US, this month’s statement acknowledges it is now only partly due to developments in the US with “other factors at work as well”. 

“The Bank doesn’t (yet) draw any implications from this and it judges the overall level of mortgage interest rates as being in decline," he said.

Westpac’s Mathew Hassan agreed that the RBA clearly needed to comment on this issue. Thus far, he went on to say, it has done so in a way that reveals very little about the Board’s thinking. 

“If anything, the wording, position of the comment in the statement, and other comments about wider financial conditions imply it is not overly concerned at this stage.”

On housing the governor’s statement notes prices are declining in both the Sydney and Melbourne markets but with national measures "little changed" over the last six months. 

Limited shelf life

As Hassan sees it, Lowe seems a little less concerned about a further tightening of lending standards by banks, which is viewed as “possible” and set against the observation that average mortgage rates on outstanding loans have declined.

“This comment probably has a limited shelf life if we are correct in our expectation that the major banks will soon implement out of cycle rate hikes in response to rising funding costs,” argued JP Morgan's Sally Auld.

JP Morgan's interest rate strategists earlier noted that the spread between the three-month bank bill swap rate and the overnight index swap rate has diverged from the US Libor-OIS spreads, after moving in tandem.

The broker identified excess issuance of Australian government bonds as being the major driver.

All up, Tuesday’s statement confirms to her that the RBA are still some way from contemplating a dovish shift.

“Even if cracks are emerging in the narrative, nothing is likely to change from the RBA’s perspective until the data are no longer consistent with its forecasts for better growth and inflation outcomes,” she said.

“This may take some time to play out, and so we continue to forecast the RBA on hold with a neutral policy bias.”

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