Daily Commentary BY THE CURVE TEAM –

RBA: Glass Still Half Full

3rd of October, 2018

The RBA remained steadfast in their central outlook yesterday despite acknowledging the growing risks coming from the housing market.

Growth is expected to remain above 3%, unemployment is expected to fall back to 5% and inflation is expected to move back towards the middle of the target band in a gradual fashion over the forecast period.

That is the continued central outlook contained in the RBA’s statement accompanying the decision to leave the cash rate on hold for a 26th straight month.

In the statement the RBA did strengthen their language a little around the growth, acknowledging the upward revisions following the latest GDP result. They upgraded their assessment of the unemployment rate which shifted from “fallen” to “trending lower”.

The main changes were left for the paragraph on the housing and credit markets. The RBA characterised credit extended to owner occupiers are remaining “robust” which is a bit of a stretch before highlighting falling demand from investors.

The key however is that “credit conditions are tighter than they have been for some time” which is the big reason behind the slowdown in the housing market. While they point out there is competition for high quality borrowers, the findings from the Royal Commission suggest that those borrowers are in the minority.

Further tightening of credit markets is expected following the interim report from the Royal Commission last week.

As far as monetary policy is concerned, it is unlikely the RBA will change their rhetoric any time soon. I wouldn’t expect them to make any revision to the outlook until the downturn in the housing market starts to impact consumption and even employment.

David Flanagan

Director - Interest Rate Markets