Daily Commentary BY THE CURVE TEAM –

RBA Sounds Warning

19th of November, 2018

The RBA’s central outlook was largely supported by the run of data last week but in a speech by the Deputy Governor, he flagged an area worth watching. Offshore and the three key themes dominating the outlook continue to provide plenty of uncertainty.

Last week’s data would have been music to the RBA’s ears with another strong labour market update, wages edging higher, consumer confidence improving and business conditions remaining above the long run average. However in a speech where Deputy Governor Guy Debelle looked at the effects of housing lending policies implemented over the past few years, he flagged an area of concern.

In his speech, Debelle touched on the fact the lending policies introduced by the Council of Financial Regulators, which the RBA leads, has impacted the housing market and house prices. The pull back in housing prices is not of great concern to the RBA at present as it sees the long run benefit benefits to household balance sheets outweighing the negative consequences of the fall in house prices so far.

The area the RBA was more concerned about was the implications for the construction sector and how it may be impacted by tighter lending standards and credit availability.

Construction was one of the big sectors that helped the economy transition away from mining led growth. Should the pick up in construction unwind too fast, it would threaten the type of economic shock that could cause the RBA to change its central outlook. There are signs that construction is under pressure and it is something to watch closely over the months ahead.

Offshore and it is the three key themes that have dominated the outlook for the past few months that continue to provide a great deal of uncertainty.

The mess that is Brexit continues to roll on and is now at a critical juncture with British Prime Minister Theresa May saying the next 7 days will be very important. The US-China trade war continues to generate headlines with plenty of tension reported at the APEC meeting in PNG over the weekend. A deal at the G20 later this month still seems unlikely but time will tell. Finally we saw signs the Fed might be closer to a pause than first thought with concerns over the international outlook growing.

It sets up for an interesting week with the RBA minutes the major highlight locally. There will be plenty of offshore data while any developments on those three key international themes will feature prominently in the headlines.

David Flanagan

Director - Interest Rate Markets