The latest housing finance figures pour yet more cold water on suggestions that the Reserve Bank might increase interest rates. There are no signs of an economy that needs slowing down, and if anything the economy is performing in a way that in previous times would have had the RBA looking to cut rates.
Next month, when (I guess we should say “if”, but, really we can almost certainly say “when”) the Reserve Bank keeps the cash rate at 1.5% it will mark two years of no changes. The last time the RBA moved the cash rate was August 2016 when it cut the rate from 1.75% to the current record low.
Over the past few months a chorus of “very serious people” have been stroking their chins and calling for the cash rate to be raised because ... well, just because.
The notional reason is that 1.5% is well below the “neutral rate” of 3.5% and the sooner we get back there the better because should things turn bad in the world economy the current rate doesn’t leave the RBA with much room to move, and other nations have already begun raising their rates.
But really, so what?
Yes, other nations, such as the USA and Canada, have been raising their official interest rates this year, but they were coming off a much lower base than ours. And both countries (and generally all other major economies) continue to have interest rates much lower than the in the pre-GFC era:
And while it is nice to think about our interest rate in terms of what other nations might be doing and what might occur in the world economy, the reality is our own economy has zero need for an interest rate rise.
Inflation and wage growth are barely registering a pulse, and using the proxy of the difference between Australian government indexed bond yields and the 10-year bond yield, the expectation for inflation remains well below anything that would have you thinking the RBA needs to apply the brakes:
And it’s a reminder that raising the cash rate does slow the economy. And the one area it slows things most directly is already doing well enough on its own.
The latest housing finance data showed that for the 11th straight month, the total value of housing finance commitments fell in trend terms. The last time that happened outside of the GFC was in 2007-08 when the RBA was raising the cash rate by a full percentage point.
Lending in May was 6.1% below 12 months ago, driven largely by a 14.3% fall in investor lending. But even the value of owner-occupier housing finance was just 0.9% above that of May last year – the lowest 12 month growth since the end of 2016:
The flee of investors from the housing market is clear when we look at total numbers.
In December 2016, there was $13bn worth of investor-housing finance taken out. Since then it has fallen each month to now being just $10.7bn – the lowest monthly amount for nearly five years:
Clearly the macroprudential tools brought in by the Apra – such as limiting the growth rate of investor credit – have worked. And the whole point of such tools is to allow the RBA to keep interest rates lower than otherwise would be the case. The limits on investor lending help curb the growth of house prices even when interest rates are at levels that in past times would have seen a housing boom.
Does that mean your mortgage rates won’t be going up any time soon? Well, alas no. There is the possibility that banks will start raising rates independent of the RBA because of a recent increase in the cost of short-term financing.
In the past few months, for reasons that are not entirely clear – but I’ll bet a few dollars on the possibility of Trump wanting to declare a trade war on the entire planet as a factor – the cost of banks’ short-term debt has risen sharply. So sharply has it risen that it is back at levels not seen since the chaos days of the GFC:
This however is not as big of an issue as back then, because before the GFC banks were using cheap short-term debt to cover about 35% of their finance, now it accounts for around only 20%.
By contrast, back then, domestic deposits (ie money we give the banks for which they pay us interest) only took up 40% of their funding, now it is 60%.
And because the interest rates people are getting for their term deposits has actually fallen on average during the period the RBA has kept the cash rate steady, the cost of such funding has fallen over the past two years:
And we should always remember that the gap between the standard variable rate and the cash rate is much larger than it was 10 years ago, and that banks have not cut their rates by as much as has the RBA over the past five years:
But even if the increase in short-term funding costs did force banks to raise their own mortgage rates, that would actually if anything put pressure on the RBA to cut rates to counteract that rise, should it believe those rises are slowing the economy by more than it likes.
It’s why there is absolutely no expectation of a rate rise in the future.
At the start of the year the market was pricing in two cash rate rises by the middle of next year; by April the expectation was for one rate rise by July next year; last month that had been pushed out to October.
Now the market rates there being barely a 50% chance of a cash rate rise happening by December 2019:
So forget the calls for rate rises and worries about “neutral rates” or what the USA is doing. Until we start to see inflation and wages getting close to normal levels, the RBA is unlikely to feel any need to move – especially if the housing market continues to slow as it has this year.
- Greg Jericho is a Guardian Australia columnist
