Daily Commentary BY THE CURVE TEAM –

Ongoing Volatility Of Concern To The RBA

3rd of April, 2018

With the RBA meeting done and dusted for another month, it looks like the concerns around the volatility of financial markets at the moment are growing. While the outcome was largely expected, there were a couple of key additions that pointed towards growing uncertainty amongst the central bank.

As expected, the RBA opted to leave rates on hold for the 20th straight month in their April Board meeting. The rhetoric in the corresponding statement was largely unchanged from the previous month, with concerns still remaining over the degree of slack in the labour force and the level of household debt, restricting household spending.

The RBA continues to remain cautiously optimistic that wages growth and inflation will take a gradual path towards target.

An interesting addition however, and something we have been talking about a fair bit of late, was around heightened market uncertainty. In particular, the statement reflected growing concerns over a more volatile equity market on the back of the trade debacle going on offshore. Governor Lowe highlighted that

Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States.”

The other key mention was around the lift in short term borrowing costs. To provide a bit of colour, 3month BBSW has lifted nearly 30bps since the start of February. Lowe highlighted this is largely offshore driven, citing that the lift in US short term rates are,

increasing for reasons other than the increase in the federal funds rate. This has flowed through to higher short-term interest rates in a few other countries, including Australia.

The reverberations of which are starting to raise eyebrows, particularly as the RBA is hamstrung between rising household indebtedness and low wage growth.

Banks are starting to feel the pressure as their cost of funding starts to rise as the spread between BBSW and the Overnight Index Swap has widened considerably. What will be key to watch is if the pressure continues to grow, will the rising costs then be passed on to the consumer through a lift in mortgage rates?

With household debt already at record levels, the consequence of which could further dampen the consumer’s ability to spend.

This ties in nicely to the data coming out of today. Building Approvals and Retail Sales are out today with the latter being of particular importance given the RBA’s concerns around the consumer.

Oliver Parsons

Client Relationship Manager