The RBA released the minutes from their last meeting. Once again low wage growth, and household debt figured in the discussion, as did a focus on financial stability and the role of prudential supervision.
Members discussed how financial stability considerations bear on monetary policy decisions, reviewing both the academic literature and policy experience in a number of countries, including Sweden and the United States.
The Bank has responsibility for promoting financial stability within its flexible medium-term inflation targeting framework. Over recent times, with interest rates at low levels, the Board has set monetary policy to support the economy in its transition following the mining investment boom, while also paying close attention to trends in household borrowing and related financial stability considerations. Members discussed the effect of monetary policy decisions on financial stability and on future inflation, employment and output. They also discussed the role that prudential supervision can play in promoting financial stability. In view of this, members acknowledged the importance of a strong relationship between the Bank and other regulators, particularly APRA. They observed that the current positive culture of cooperation across the relevant agencies in Australia has been of considerable value to good policy outcomes in recent years and it is therefore important that it be maintained. The strong relationship among regulators is facilitated by the Council of Financial Regulators, which is the coordinating body for the main financial regulatory agencies to promote the stability of the Australian financial system, as well as contribute to the efficiency and effectiveness of financial regulation.
Turning to the immediate decision regarding the level of the cash rate, members noted that the broad-based pick-up in the world economy was continuing. Labour markets had tightened further in many countries and this was expected to lead to a pick-up in wages and prices over time. Headline inflation rates in most countries had moved higher over the past year, partly reflecting higher commodity prices. Nonetheless, core inflation had remained low.
Domestically, members’ assessment was that the transition to lower levels of mining investment following the mining investment boom was almost complete. Surveyed business conditions had improved and business investment had picked up in those parts of the economy not directly affected by the decline in mining investment. Although year-ended GDP growth was expected to have slowed in the March quarter, reflecting the quarter-to-quarter variation in the figures, members noted that economic growth was still expected to increase gradually over the next couple of years to a little above 3 per cent per annum.
Members noted that, although employment growth had been stronger in recent months, growth in total hours worked had declined. Nevertheless, the various forward-looking indicators pointed to continued growth in employment over the period ahead and a gradual erosion of the spare capacity in the labour market. Wage growth had remained low and this was likely to remain the case for some time yet. However, wage growth and inflation were expected to increase gradually as the economy strengthened. Members observed that low growth in incomes, along with high levels of household debt, appeared to have been restraining growth in household consumption.
The economic outlook continued to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 had also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.
Conditions in the housing market had continued to vary considerably around the country. Housing prices had been rising briskly in some markets, although there had been some signs that price pressures were starting to ease. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in housing debt had outpaced the slow growth in household incomes. APRA’s recent prudential supervision measures should help address the risks associated with high and rising levels of indebtedness. In response to those measures, increases in mortgage rates, particularly for investors and interest-only loans, had been announced, but were yet to have their full effect.
The Board continued to judge that developments in the labour and housing markets warranted careful monitoring. Taking into account all the available information, including that year-ended growth in output was expected to have slowed in the March quarter, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.