RBA Bullish On Growth

The latest RBA Statement on Monetary Policy released today appears to be very upbeat. Despite forecasting growth down a bit in the near term, they are still holding the view of growth above 3% later, and if this is correct, supported by and improving international economic outlook, a rise in business investment, strong exports and low unemployment, then it seems to me conditions would be right to lift the cash rate towards the neutral position (which as we saw recently they hold to be 2% higher than current levels). That said, many economic commentators think the RBA is overly bullish, given high household debt and flat income growth, and risks in the property market.  Here are some relevant extracts.

The economy is expected to grow at an annual rate of around 3 per cent over the next couple of years, which is a bit higher than estimates of potential growth. The unemployment rate is accordingly expected to edge lower. Underlying inflation is higher than late last year; it is expected to reach around 2 per cent over the second half of 2017 and increase a little thereafter. The forecast for headline inflation has been revised a little higher, and lies between 2 and 3 per cent over much of the forecast period.

The forecast pick-up in inflation reflects a number of factors. As spare capacity in the labour market declines, this is expected to lead to a gradual increase in wage growth from its current low rates. Higher utilities inflation will add to overall inflation over the next year, although it is difficult to know exactly how much higher energy costs will be built into the prices of other goods and services. Headline inflation will also be boosted by further tobacco excise increases over the next couple of years.

Working in the opposite direction are the effects of the recent exchange rate appreciation, ongoing competition in the retail industry and low rent inflation.

By the end of the forecast period, the unemployment rate is forecast to be a little under 5½ per cent. This forecast is little changed from three months ago, and implies that some spare capacity in the labour market will remain. Recent stronger conditions in the labour market have afforded greater confidence in this forecast. Since the start of the year, around 165 000 full-time jobs have been created, average hours worked have increased and labour force participation has risen. Employment has increased in every state over this period, including in the miningexposed states. This suggests that the drag on economic activity from the earlier declines in the terms of trade and falling mining investment is running its course. The unemployment and underemployment rates have both edged lower. Indicators of labour demand point to continued employment growth and little change in the unemployment rate over coming quarters.

Wage growth is expected to remain subdued, but to increase gradually over the forecast period as labour market conditions continue to improve. The increase in minimum and award wages announced by the Fair Work Commission will add a little to wage growth in the September quarter.

The experience of some economies that are already close to full employment suggests that declining spare capacity might take some time to flow through to wage and thus price inflation. Inflationary pressures could instead emerge more quickly if workers seek to ‘catch up’ after a long period of low wage growth. The recent growth in employment is supporting growth in household income and indications are that growth in household consumption increased in the June quarter. Further out, continued employment growth and somewhat faster average household income growth are expected to support consumption growth, which is forecast to be a little above its post-crisis average in the period ahead.

A number of factors could offset the forces supporting stronger consumption growth. Slow real wage growth is likely to weigh on consumption, especially if households expect the slow growth to continue for some time.

However, ongoing expectations for low real wage growth remain a key downside risk for household spending. The recent sharp increase in the relative price of utilities poses a further downside risk to the non-energy part of household consumption to the extent that households find it hard to reduce their energy consumption; this is likely to have a larger effect on the consumption decisions of lower-income households.

Some households may also feel constrained from spending more out of their current incomes because of elevated levels of household debt. This effect would become more prominent if housing prices and other housing market conditions were to weaken significantly. Household debt is likely to remain elevated for some time: housing credit growth overall has been steady over the past six months, but has continued to outpace income growth. The composition of that debt is changing, however, as lenders respond to regulators’ recent measures to contain risks in the mortgage market. Investor credit growth has moderated and loan approvals data suggest this will continue in coming months. Also, new interest-only lending has declined recently in response to the higher interest rates now applying to these loans and other actions by the banks to tighten lending standards.

Dwelling investment is likely to recover from the partly weather-related weakness of the March quarter and stay at a high level over the next year or so, sustained by the large pipeline of residential building work already approved or underway. However, dwelling investment is not expected to make a material contribution to GDP growth.

The number of new residential building approvals has stepped down since last year; if they remain at this level, dwelling investment would be expected to start to decline in a year or so. Conditions in the established housing markets of the two largest cities remain fairly strong, although housing price growth appears to have eased a bit in recent months, more so in Sydney than in Melbourne. Housing prices in Perth have declined a little further, while growth in apartment prices in Brisbane has been weak.

Looking at Bank Funding the RBA says the implied spread between lending rates and debt funding costs for the major banks is estimated to have increased over the past year. Most of this increase was a result of higher interest rates on investor and interest-only housing lending. Lower funding costs have also contributed to the increase in the implied spread.

Housing credit growth has been stable over recent months. Growth in investor housing credit has declined recently, after accelerating through the second half of 2016. This has been largely offset by slightly faster growth in housing credit extended to owner-occupiers.

There are a number of uncertainties that could affect housing prices, particularly in the eastern states. The risk of more weakness in apartment prices in some locations where a large amount of supply is coming online remains. This could mean that buildings approved but not commenced do not go ahead, in which case dwelling investment and related household spending would be weaker than expected. Declining housing prices could also cause difficulties for some apartment developers.

Recent state and federal budget measures intended to restrain foreign investment have not yet had time to have had their full effects, which are uncertain; however, the effects are likely to be
largest in housing markets where foreign buyers have been most active, particularly inner-city apartments.


Retail Turnover Remains Pretty Flat

The trend estimate for Australian retail turnover rose 0.4 per cent in June 2017 following a 0.4 per cent rise in May 2017. Compared to June 2016, the trend estimate rose 3.6 per cent, according to the latest Australian Bureau of Statistics (ABS) Retail Trade figures.

In seasonally adjusted terms, Australian retail turnover rose 0.3 per cent in June 2017 , following a rise of 0.6 per cent in May 2017.

“In seasonally adjusted terms in June 2017, we saw rises in Household goods retailing (0.9 per cent), Cafes, restaurants and takeaway food services (0.5 per cent), Clothing footwear and personal accessory retailing (0.8 per cent) and Other retailing (0.2 per cent),” said Ben James, Director of Quarterly Economy Wide Surveys. “There was a fall in Department stores (-0.3 per cent), while Food retailing (0.0 per cent) was relatively unchanged.”

The trend by state shows Tasmania and ACT ahead of the average, with Western Australian and NT, continuing to trail.

In seasonally adjusted terms there were rises in New South Wales (0.5 per cent), Queensland (0.7 per cent), South Australia (0.3 per cent), Tasmania (0.6 per cent), the Northern Territory (1.2 per cent) and Western Australia (0.1 per cent). There were falls in Victoria (-0.3 per cent) and the Australian Capital Territory (-0.1 per cent).

Online retail turnover contributed 4.1 per cent to total retail turnover in original terms.

In seasonally adjusted volume terms, turnover rose 1.5 per cent in the June quarter 2017, following a rise of 0.2 per cent in the March quarter 2017. The largest contributor to the rise was Household goods retailing, which rose 2.5 per cent in seasonally adjusted volume terms in the June quarter 2017.

US Firms Coy About Borrowing More

From Moody’s

Comparatively thin high-yield bond spreads complement an increased willingness by banks to supply credit to businesses. The increased willingness to make business loans owes much to a benign outlook for defaults.

According to the Fed’s latest survey of senior bank loan officers, the net percent of banks tightening business — or commercial & industrial (C&I) — loan standards dipped from the +2.2 percentage point average of the four-quarters-ending with Q2- 2017 to the -3.9 points of Q3-2017. Moreover, the net percent of banks widening interest-rate spreads on new business loans plunged from the -7.9 percentage point average of the year-ended Q2-2017 to Q3-2017’s -21.1 points.

Though banks are more willing to lend to businesses, the business sector’s demand for C&I loans has receded. The same Fed survey of senior bank loan officers also found that the net percent of banks reporting a stronger demand for C&I loans from business customers sank from the -2.1 percentage-point average of the year-ended June 2017 to Q3-2017’s -11.8 points, which was the lowest quarter-long score since Q4-2011’s -15.7 points. However, Q4-2011’s reading followed a string of strong results as shown by the +14.9-point average of yearlong 2011.

By contrast, as of Q3-2017, the yearlong average of the net percent of banks reporting a stronger demand for C&I loans from business customers dropped to -6.2 points for its lowest such average since the -9.5 points of yearlong 2010. (Figure 3.)

Business borrowing says cycle upturn is past its prime

It is worth noting how the latest slide by the business-sector’s demand for C&I loans has occurred more than four years following a recession. In the context of a mature business cycle upturn, the yearlong average of the net percent of banks reporting a stronger demand for C&I loans previously sank to the -6.2 points of the span-ended Q3-2017 in Q2-2007 and Q4-2000.

Recessions materialized within 12 months of the previous two comparable drops by the business sector’s demand for bank credit. Granted the US may stay clear of a recession well into 2018, but the reality is that the current business cycle upturn is showing signs of age. Thus, the upside for interest rates is limited, especially if the annual, or year-to-year, rate of core PCE price index inflation stays under 2%. (Figure 4.)

A pronounced slowing by the annual growth rate of outstanding bank C&I loans from Q2-2016’s 10.2% surge to Q2-2017’s 2.2% rise is in keeping with a softer demand for C&I loans by business borrowers. However, the pace of newly rated bank loan programs from high-yield issuers tells a much different story.

After surging by 140.2% in Q1-2017 from Q1-2016’s depressed pace, the annual increase of new high-yield bank loan programs slowed to 2.1% in Q2-2017. Nonetheless, recent activity suggests the year-over-year growth rate for new high-yield bank loan programs will accelerate to roughly 16% during 2017’s third quarter. Support for this view comes from July 2017’s $52.4 billion of new bank loan programs from high-yield issuers that more than doubled the $24.1 billion of July 2016.

Lately, the growth of high-yield bank loan programs has been powered by refinancings of outstanding debt and the funding of acquisitions. Today’s relative ease of refinancing outstanding debt at easier terms highlights ample systemic liquidity, which will help suppress the incidence of default. Abundant liquidity also facilitates the take-over of weaker, default prone businesses by financially stronger entities. (Figure 5.)

A Dip into Subzero Policy Rates

From The IMF Blog.

Zero was gradually adopted in the ancient world—both east and west—as the ultimate point of reference, a point above and below which things change. For the ancient Egyptians, zero represented the base of pyramids. In science it became the freezing point of water, in geography the altitude of the sea, in history the starting point of calendars.

In the realm of monetary policy, zero was typically seen as the lower bound for interest rates. That has changed in recent years in the context of a slow recovery from the 2008 crisis. Several central banks hit zero and began experimenting with negative interest rate policies. Most did so to counter very low inflation, but some also were concerned about currencies that were too strong.

Financial stability

Questions arose. Should we worry about the effectiveness of negative rates and their potential side effects? Would such policies support demand? Would they undermine financial stability? Would rate cuts below zero have different effects than above zero? We offered some answers in a recent paper drawing on the initial experience of the euro area, Denmark, Japan, Sweden, and Switzerland.

Our paper confirms and builds on initial discussions in IMFBlog by José Viñals, a former director of the IMF’s Monetary and Capital Markets Department, and some of his colleagues. Among our conclusions: the mechanics of monetary policy’s effect on the economy is similar above and below zero, and so far the overall impact on bank profits and lending has been small. But there are limits to the policy.

Why consider the effects of negative rates now, when talk is shifting to interest rate normalization? For two reasons. First, we have accumulated enough experience—two years in most cases, more in others—to gauge the effects with greater certainty. Second, with rates expected to be generally lower in the new normal, the odds of hitting zero if monetary policy needs to be eased again are likely to be higher.

Why worry?

The fear is that negative rates could squeeze bank profits. Banks make money by charging borrowers more than they pay depositors. This margin could be compressed if deposit rates don’t fall as fast as lending rates or ultimately bottom out at zero. This scenario could put financial stability at risk because lower profits would make banks less resilient to shocks. It could also undermine the impact of monetary policy on lending, growth, and price stability.

Banks will hesitate to impose negative rates on depositors who have the option to withdraw their money and stash it in a safe. While storing, moving, and insuring cash is costly, it could be cheaper than paying the bank to hold money if rates are pushed very far below zero. Where is the tipping point? No one knows for sure. Depositors with larger cash balances and higher liquidity needs—such as companies—will tolerate more negative rates before switching to cash. Banks can thus afford to pass on negative rates to some of their depositors, and they have.

Banks can also cushion their margins by lowering lending rates by less than the policy rate cut. This will happen automatically if their portfolios consist primarily of long-term and fixed-rate loans and other assets. (At the same time, this more limited pass-through will reduce the impact of the policy rate cut.) Banks that rely more on large deposits and wholesale funding may gain ground against those relying primarily on retail deposits.

Further, even if margins compress somewhat, profits will not necessarily drop. Banks can support profits by charging fees and commissions, lowering provisioning charges as borrowers become safer, switching to cheaper wholesale funding, cutting costs, and booking capital gains from policy rate cuts. In addition, lower rates will spur economic growth and thus demand for bank services, which will ease the pressure on margins.

Early days

A review of early country experiences with relatively small cuts below zero supports this more benign view.

Overall, the policy seems to have worked well: money market rates and bond yields fell in every country we looked at. Currencies also weakened somewhat, at least temporarily. Deposit rates mostly remained positive, except those of large companies. Lending rates declined somewhat, though less than policy rates. Banks benefited from lower wholesale funding costs, and some raised fees. Bank profits have generally been resilient. Lending has held up.

But some banks suffered. As predicted, negative rates weighed on profits of banks with a greater share of deposit funding, small retail clients, short-term loans, and loans indexed to the policy rate (for example, in some southern members of the euro area). Banks facing tougher competition from lower-cost lenders and capital markets were also hurt.

Not the whole answer

So far, so good. Negative-rate policies appear to have helped domestic monetary conditions somewhat, with no major side effects on bank profits, payment systems, or market functioning.

However, if policy rates remain negative for a long time, or if a deeper dive below zero is contemplated, the effectiveness of the policy and the stability of the financial system could be at risk. Further, the ability of depositors to switch to cash limits how much rates can be cut. Other monetary support, combined with fiscal policy and structural reforms, remain critical to support recoveries.

Foreign Investors in Sydney paying almost four times as much stamp duty as locals

The HIA says recent changes to stamp duty in NSW mean that foreign investors now pay almost $100,000 in transaction taxes to acquire a standard apartment in Sydney – almost four times as much as local buyers.

This remarkable finding is contained in the latest Stamp Duty Watch report which has just been released by the Housing Industry Association.

The average stamp duty bill in Australia paid by resident owner occupiers is also up by 16.4 per over the year to $20,725, even though dwelling prices increased by just 10.5 per cent .

On the owner occupier side, stamp duty drains family coffers of $107 each and every month over a 30-year mortgage term. For owner occupiers, the typical stamp duty bill now amounts to $20,725 – an increase of some 16.4 per cent on a year ago.

Shelling out so much in stamp duty drains the household piggy bank of vital funds for their home deposit. Families are then forced to take out larger mortgages and incur heavier mortgage insurance premiums.

Foreign investors are a vital component of rental supply in cities like Sydney and Melbourne. With rental market conditions now so tight in Australia’s two biggest cities, should we really be placing more and more barriers in the way of new supply?

All Hands on Deck: Confronting the Challenges of Capital Flows

From The IMF Blog.

The global financial crisis and its aftermath saw boom-bust cycles in capital flows of unprecedented magnitude. Traditionally, emerging market economies were counselled not to impede capital flows. In recent years, however, there has been growing recognition that emerging market economies may benefit from more proactive management to avoid crisis when flows eventually recede. But do they adopt such a proactive approach in practice?

In recent research, we analyze the policy response of emerging markets to capital inflows using quarterly data over 2005–13. Our analysis shows that emerging markets do react to capital flows—most commonly through foreign exchange intervention and monetary policy, but also using macroprudential measures and capital controls. Ironically, the most commonly prescribed instrument for coping with capital flows—tighter fiscal policy—is the least deployed in practice.

Menu of policies

Policymakers in emerging market economies have potentially five tools to manage capital flows: monetary policy; fiscal policy; exchange rate policy; macro-prudential measures; and capital controls. In deploying these, there is a natural correspondence (or mapping) between risks and instruments.

Monetary and fiscal policies can help address the inflation and economic overheating concerns raised by capital inflows. When the currency is not undervalued, foreign exchange intervention can be used to limit currency appreciation that threatens competitiveness; and macroprudential measures (such as reserve requirements, capital adequacy ratios, dynamic loan loss provisioning, etc.) can be applied to curb excessive credit growth and related financial stability risks.

Capital inflow controls can buttress these policies by limiting the volume of capital inflows or by tilting the composition of flows toward less risky types of liabilities. Countries with controls on capital outflows can also relax these restrictions to lower the volume of net flows, reducing overheating and currency appreciation pressures.

Proactive central bank response

Capital flows to emerging markets have been particularly volatile over the last decade. But emerging markets’ central banks have not been indifferent to this volatility.

Foreign exchange intervention, for example, follows the ebbs and flows of capital, with a strong correspondence between reserve accumulation and net inflows. On average, emerging markets’ central banks purchase some 30–40 percent of the inflow, but some central banks, especially those in Asia (such as India, Indonesia, Malaysia) and Latin America (Brazil, Peru) tend to intervene more heavily, while others (such as Mexico and South Africa) tend to intervene less.

In terms of monetary policy, capital inflows elicit higher policy rates in emerging markets on average, though the impact depends on the behavior of inflation, the output gap (a measure of economic slack), and the real exchange rate. Policy rates are thus raised in response to higher inflation or a larger output gap—implying a counter-cyclical monetary policy stance—but lowered in response to real exchange rate appreciation.

Procyclical fiscal policy

When it comes to fiscal policy, however, the stance is strongly procyclical in the face of capital inflows. Thus, government consumption expenditure rises as capital inflows surge, and falls as capital inflows decrease—presumably because of political economy constraints, and/or because emerging markets face difficulty in accessing international credit markets in bad times.

Less orthodox policies

Turning to macroprudential measures and capital controls on inflows, our analysis shows that these measures are generally tightened as inflows surge and relaxed when flows recede. There is, however, considerable cross-country variation in response. Some countries, such as Brazil, Korea, Turkey, tend to use these measures more often than others.

For capital outflow controls, the reverse is true. Measures are relaxed when inflows surge—though it is only countries without fully open capital accounts, for example, India and South Africa, that tend to do so.

Natural mapping

Not only do emerging markets respond to inflows through various tools, their choice of the policy instrument also corresponds to the nature of the risk posed by capital flows.

Thus, foreign exchange intervention is generally used when the real effective exchange rate is appreciating, while what matters more for monetary policy tightening is the output gap. Macroprudential measures are typically deployed in the face of rapid domestic credit growth, while inflow controls are tightened when both credit growth and currency appreciation combine as a concern.

Bottom line

Following the repeated boom-bust cycles in capital flows, many emerging markets have internalized the lessons that they must manage capital flows if they are to reap the benefits of financial globalization, while minimizing the risks. They typically deploy a combination of instruments, with some correspondence between the nature of the risk and the tool deployed.

Nevertheless, there are important differences in policy response across countries, even in similar macroeconomic circumstances. This suggests that structural characteristics and political economy considerations may be at play in shaping a country’s specific policy response. An equally relevant question is whether the active policy management pursued by emerging economies has contributed to fewer financial crises in recent years. We hope that future research can shed light on these issues.

Some Falls In New Personal Insolvencies For June 17 Quarter

The Australian Financial Security Authority (AFSA) released regional personal insolvency statistics for the June quarter 2017.

There were 7,729 debtors who entered a new personal insolvency in the June quarter 2017 in Australia. This is a fall of 311 debtors (3.9%) compared to the March quarter 2017. Victoria and Queensland had the strongest falls, falling by 131 and 111 debtors respectively. Both of these states had falls in the number of debtors in both the capital city and the rest of the state.

Regional Queensland has the highest relative proportion of debtors, and the were also more in regional NSW compared with those in the City.

Personal insolvency in Australia: capital cities compared to rest of state

New South Wales

There were 1,297 debtors who entered a new personal insolvency in Greater Sydney in the June quarter 2017. The regions with the highest number of debtors were Campbelltown (83), Wyong (74) and Penrith (71).

There were 892 debtors who entered a new personal insolvency in rest of New South Wales in the June quarter 2017. The regions with the highest number of debtors were Newcastle (43), Tamworth – Gunnedah (42) and Shoalhaven (42).


There were 1,045 debtors who entered new personal insolvencies in Greater Melbourne in the June quarter 2017. The regions with the highest number of debtors were Casey – South (76), Wyndham (71) and Whittlesea – Wallan (70).

There were 410 debtors who entered a new personal insolvency in rest of Victoria in the June quarter 2017. The regions with the highest number of debtors were Geelong (59), Ballarat (45) and Bendigo (29).


There were 1,023 debtors who entered a new personal insolvency in Greater Brisbane in the June quarter 2017. The regions with the highest number of debtors were Springfield – Redbank (71), Browns Plains (70) and Ipswich Inner (55).

There were 1,272 debtors who entered a new personal insolvency in rest of Queensland in the June quarter 2017. The regions with the highest number of debtors were Townsville (116), Ormeau – Oxenford (95) and Mackay (91).

South Australia

There were 378 debtors who entered a new personal insolvency in Greater Adelaide in the June quarter 2017. The regions with the highest number of debtors were Onkaparinga (67), Playford (53) and Salisbury (41).

There were 115 debtors who entered a new personal insolvency in rest of South Australia in the June quarter 2017. The regions with the highest number of debtors were Eyre Peninsula and South West (29), Limestone Coast (20) and Murray and Mallee (12).

Western Australia

There were 755 debtors who entered a new personal insolvency in Greater Perth in the June quarter 2017. The regions with the highest number of debtors were Wanneroo (86), Rockingham (77) and Swan (74).

There were 161 debtors who entered a new personal insolvency in rest of Western Australia in the June quarter 2017. The regions with the highest number of debtors were Bunbury (43), Wheat Belt – North (21), Augusta – Margaret River – Busselton (18), Mid West (18) and Pilbara (18).


There were 84 debtors who entered a new personal insolvency in Greater Hobart in the June quarter 2017. The regions with the highest number of debtors were Hobart – North West (38), Hobart – North East (16) and Hobart – South and West (12).

There were 98 debtors who entered a new personal insolvency in rest of Tasmania in the June quarter 2017. The regions with the highest number of debtors were Launceston (33), Devonport (16) and Burnie – Ulverstone (14).

Northern Territory

There were 52 debtors who entered a new personal insolvency in Greater Darwin in the June quarter 2017. The regions with the highest number of debtors were Palmerston (19), Darwin Suburbs (16) and Darwin City (9).

There were 30 debtors who entered a new personal insolvency in rest of Northern Territory in the June quarter 2017. The regions with the highest number of debtors were Alice Springs (14) and Katherine (11).

Australian Capital Territory

In the June quarter 2017, 89 debtors entered new personal insolvencies in the Australian Capital Territory. The regions with the highest number of debtors were Tuggeranong (31), Gungahlin (22) and Belconnen (20).

RBA Holds Cash Rate Once Again

The RBA held the cash rate today, and gave little new information, though suggesting that growth is still expected to pick up, and employment improve, but not wage growth. They also warn “growth in housing debt has been outpacing the slow growth in household incomes”, signalling even higher household debt. What was new was a warning about the drag effect on growth of a higher dollar!

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy are continuing to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy has picked up a little and is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Commodity prices have generally risen recently, although Australia’s terms of trade are still expected to decline over the period ahead.

Wage growth remains subdued in most countries, as does core inflation. Headline inflation rates have declined recently, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve expects to increase interest rates further and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively and volatility remains low.

The Bank’s forecasts for the Australian economy are largely unchanged. Over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent. The transition to lower levels of mining investment following the mining investment boom is almost complete, with some large LNG projects now close to completion. Business conditions have improved and capacity utilisation has increased. Some pick-up in non-mining business investment is expected. The current high level of residential construction is forecast to be maintained for some time, before gradually easing. One source of uncertainty for the domestic economy is the outlook for consumption. Retail sales have picked up recently, but slow growth in real wages and high levels of household debt are likely to constrain growth in spending.

Employment growth has been stronger over recent months, and has increased in all states. The various forward-looking indicators point to continued growth in employment over the period ahead. The unemployment rate is expected to decline a little over the next couple of years. Against this, however, wage growth remains low and this is likely to continue for a while yet.

The recent inflation data were broadly as the Bank expected. Both CPI inflation and measures of underlying inflation are running at a little under 2 per cent. Inflation is expected to pick up gradually as the economy strengthens. Higher prices for electricity and tobacco are expected to boost CPI inflation. A factor working in the other direction is increased competition from new entrants in the retail industry.

The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Conditions in the housing market vary considerably around the country. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease. In some other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities. Investors in residential property are facing higher interest rates. There has also been some tightening of credit conditions following recent supervisory measures to address the risks associated with high and rising levels of household indebtedness. Growth in housing debt has been outpacing the slow growth in household incomes.

The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Home Loans Still Rising Too Fast

The latest monthly banking statistics for July 2017 from APRA are out. It reconfirms that growth in the mortgage books of the banks is still growing too fast. The value of their mortgage books rose 0.63% in the month to $1.57 trillion. Within that, owner occupied loans rose 0.73% to $1,017 billion whilst investor loans rose 0.44% to $522 billion.

Investor loans were 35.18% of the portfolio.

The monthly growth rates continues to accelerate, with both owner occupied and investor loans growing (despite the weak regulatory intervention).  On an annual basis owner occupied loans are 6.9% higher than a year ago, and investor loans 4.8% higher. Both well above inflation and income growth, so household debt looks to rise further. The remarkable relative inaction by the regulators remains a mystery to me given these numbers. Whilst they jawbone about the risks of high household debt, they are not acting to control this growth.

Looking at individual lenders, there was no change in the overall ranking by share.

But interestingly, we see significant variations in strategy working through to changes in the majors month on month portfolio movements.

ANZ has focussed on growing its owner occupied book, WBC is still in growth mode on both fronts, whilst CBA dropped their investor portfolio. We also saw a number of smaller lenders expand their books.

Looking at the speed limit on investor loans – 10% is too high -we see the investor market at 5% (sum of monthly movements), with all the majors well below the limit. But some smaller players are still growing faster.

We have to conclude one of two things. Either the regulators are not serious about slowing household debt growth, and the recent language is simply lip service (after all the strategy has been to use households as the growth engine as the mining sector faded), or they are hoping their interventions so far will work though, given time. Well given the recent auction results (still strong) and the loan growth (still strong) we do not believe enough is being done. Time is not their friend.

Indeed, later this week we will release our mortgage stress update. We suspect households will continue to have debt issues, and this will be exacerbated by interest rate rises in a flat income, high cost growth scenario many households are facing. The bigger the debt burden, the longer it will be to work through the system, with major economic ramifications meantime.

The RBA data will be out later, and we will see if there have been more loans switched between category, and whether non-banks are also growing their books. Both are likely.



Income divide between rich and poor Australians widening

From The New Daily.

Income inequality is worsening in Australia, according to comprehensive new research that finds renters, pensioners and students are feeling the pinch while high earners get pay rises.

ME bank’s twice-yearly survey of 1500 households, conducted in June and published on Monday, revealed bigger gaps in income, housing and financial worries across the nation.

In the last financial year, the overwhelming majority of Australian households (68 per cent) saw their incomes stagnate or fall. Only 32 per cent got pay rises – the lowest in three years.

Income inequality was apparent.

Almost half (45 per cent) of households earning less than $40,000 said their incomes went backwards, while almost half (46 per cent) of households on at least $100,000 saw pay rises. These high earners were least likely (17 per cent) to report income cuts.

Meanwhile, the incomes of 46 per cent of the middle class (households earning $75,000 to $100,000 a year) were stagnant in 2016-17, according to the survey.

If the results reflect the nation’s finances, then just over half of all Australians (51 per cent) are living pay cheque to pay cheque, spending all their income or more each month, with nothing leftover.

ME’s consulting economist Jeff Oughton, who co-authored the report, said the findings were relevant to the current debate over inequality because “this is how people feel”.

“The bill shock, the income cuts and the housing stress were quite loud signals,” he told The New Daily.

“There have been different winners and losers here, post the global financial crisis, and different winners and losers from low interest rates.”

The good news was that, overall, those who filled out the 17-page survey were feeling slightly less worried about their finances, perhaps because the global economy appears to be recovering.

ME’s financial comfort index − measured by combining reflections on debt, income, retirement, savings and long-term investments − is now at 5.51 out of 10, up from 5.39 in 2012.

However, vulnerable groups were doing it tough.

Renters were far less financially comfortable (4.52 out of 10) than those paying off a mortgage (5.47) and outright home owners (6.44).

Students were the most worried. Their financial confidence plummeted from just over five to 4.32 over the last year, the lowest since the survey began in 2011. This may have been a response to the government’s increase to university debt repayments.

Single parents improved but still ranked poorly (4.95 out of 10).

Self-funded retirees were the most comfortable (7.12 out of 10) while age pensioners were among the least (5.03).

Households earning over $200,000 recorded a staggering double-digit rise in financial comfort – up 10 per cent to 7.85 out of 10 – while those on $40,000 or less were stuck at 4.43.

Overall, Australians were more confident about their debt levels (6.31 out of 10), income (5.72), retirement (5.18), savings (5.07) and long-term investments (4.99).

The only key measure of financial comfort that worsened was when households were asked to imagine their finances in 2017-18: confidence on that measure fell three per cent to 5.31 out of 10, reflecting a general pessimism in the economy.

According to the report, a key reason many Australians fear the future is that, despite low inflation, the price of fuel, power, groceries and other necessities appear high and rising.

A growing number also expect their ability to manage debt to deteriorate if mortgage interest rates rise significantly.

One in five households said they spent more than half their disposable income on housing payments – with the majority renters.

A third (31 per cent) expected to be worse off financially if the Reserve Bank raised the official cash rate by 100 basis points, from 1.5 to 2.5 per cent, including half (47 per cent) of those with a mortgage.

However, 29 per cent said they would be better off – a reflection of those who own their homes and investors seeking better returns.

Generation X, those born between 1961 and 1981 (41 per cent), and single parents (36 per cent) were those most concerned about rising rates. And owner-occupiers (53 per cent ‘worse off’, 22 per cent ‘better off’) were far more concerned than property investors (35 per cent ‘worse off’, 29 per cent ‘better off’).

Households who expected to benefit from rising rates included outright home owners (38 per cent), those earning $100,000+ (36 per cent) and retirees (32 per cent).

Pleasingly, only three per cent of households said they were behind on their mortgage payments. But this was much higher among single parents (15 per cent) and Australians earning under $40,000 a year (9 per cent).

There was also a spike in those who expected to fail to meet minimum debt repayments in the next 6 to 12 months, up from 5 per cent to 9 per cent.

Further reflecting the divide, all groups of workers – full-timers, self-employed, part-timers and casuals – reported more financial confidence.

But the comfort levels of the unemployed plummeted from 4.5 to 3.12 out of 10, the lowest ever.

The divide was also seen across geographical regions. Metro areas rated their financial comfort 5.66 out of 10, while regional areas were 5.05.

The only state to worsen was South Australia, where financial comfort fell from 5.70 to 5.20 out of 10 over the last year.