Daily Commentary BY THE CURVE TEAM –

Today’s RBA Data Could Hold the Key to the Outlook for Interest Rates

31st of July, 2018

There is a lot of hand wringing going on at the moment around the outlook for the housing market and how it might impact the broader economy. Much of it comes down to credit, both the availability of it and the cost of it. Today we get an important update which impacts both.

Today the RBA will release its data on credit aggregates for the past month. Usually the focus is on the pace of credit growth as it has obvious implications for the level of activity in the economy.

What has become more prevalent in recent months has been the growth rate in broad money. As per the RBA’s definition, broad money is defined as:

“Currency plus ADI deposits from the non-AFI private sector, plus other short-term liquid AFI liabilities held by the non-AFI private sector.”

In laymen’s terms, broad money is the amount of money in the system and as such, its growth rate largely determines the availability and cost of credit.

Up until last month, the annual rate of broad money had slowed significantly. Drilling down to the monthly data shows broad money hasn’t actually grown since October of last year. At the same time, the growth rate of outstanding debt in Australia has continued to grow at an annual rate north of 5%.

Economics 101 tells us that for any given level of demand, a fall in supply results in higher prices. That is exactly what we have seen over the past few months. As the supply of funding in the system has stopped growing, credit has continued to grow, pushing up the price of funding.

Some of this increase has been passed on smaller lenders with the majors resorting to other tactics to preserve their net interest margin as the cost of funding has risen. It is widely expected that even they will need to pass the increase in costs on at some point.

As such, today’s release from the RBA is very important as the cost of funding and thus credit, has important implications for not only the housing market, but the broader economy as well.

David Flanagan

Director - Interest Rate Markets