Daily Commentary BY THE CURVE TEAM –

What Is The Latest In The Growth Story?

24th of April, 2018

We eagerly await the latest CPI data for the first quarter, whilst the RBA’s Chris Kent delivers a topical speech on interest-only loans.

The Q1 CPI reading at 11.30am is the key piece of data this week. The market is expecting a print of 0.5% for the quarter, taking the year-on-year to 2.0%. Q1 in 2017 was 0.5% as well so any change will obviously come with a revision to the yearly figure.

We saw overnight considerable strength in the USD in relation to almost every other currency. As such, if CPI prints on the lower end of expectations, then the AUD might take a small hit as well. Any print at the survey number or above should give the RBA some sort of confidence in the short-term but probably not enough to change tack about the growth outlook. We will discuss the CPI read in more detail on Thursday.

RBA Assistant Governor Chris Kent spoke about interest-only loans this morning. He discusses the risks of interest-only loans in detail, the extra interest revenue for lenders and the reasons why borrowers might take up these loans. Some of the reasons for borrowers include periods of low income, the flexibility in terms of debt repayment, tax benefits for interest deductions and also the ability to free up funds for other investments.

Kent says the large amount of interest-only loans due to expire into P&I loans is significant, however the cash-flow effect during its transition is likely to be moderate. He says;

“Indeed, the substantial transition away from interest-only loans over the past year has been relatively smooth overall, and is likely to remain so. Nevertheless, it is something that we will continue to monitor closely.”

The RBA will be monitoring the transition very closely because the consequences have the potential to have a material effect on the economy’s health and the RBA’s monetary policy decisions.

James Winder

Associate Director