The Reserve Bank of Australia (RBA) left the cash rate steady at 1.5% at the conclusion of its April monetary policy meeting, an outcome that was widely expected by economists and financial markets alike.

Following moves from APRA and ASIC to rein in interest-only mortgage lending in recent days, it came as little surprise that the most significant changes within the accompanying monetary policy statement were due to housing market conditions.

“Conditions in the housing market continue to vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining,” it said, echoing the view offered in March.

However, that’s were the similarities stopped.

“Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income,” it said, noting that “growth in rents is the slowest for two decades”.

That was a clear message on building financial stability risks, particularly in relation to investors who are taking on additional levels of leverage to purchase homes at a time when rental growth is so low.

Looking though the central bank speak, that sounds like the bank is concerned about speculation in the housing market.

In response to those concerns, it said that “lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions”.

It also said that a “reduced reliance on interest-only housing loans in the Australian market would also be a positive development”, noting that lenders had “recently announced increases in mortgage rates, particularly those paid by investors”.

Following the decision from Australia’s banking regulator, APRA, to do just that last Friday, limiting the proportion of interest-only loans to 30% of all new mortgage debt, it expressed confidence that the measures will help to reduce building financial stability risks.

“By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness,” it said.

Perhaps explaining the bank’s more forceful tone on developments in the housing market, the board also expressed increased concern over current job market conditions, acknowledging that they have “softened recently”.

“In particular, the unemployment rate has moved a little higher and employment growth is modest,” it said. “The various forward-looking indicators still point to continued growth in employment over the period ahead.”

Perhaps as a consequence of recent developments, it said said that “wage growth remains slow”. As a result, it said that “the rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued”.

That could have implications in the future, particularly as the RBA was forecasting that underlying inflation was unlikely to return to the bottom of its 2-3% target band until the middle of next year.

It’s clear that the bank’s concerns over Australia’s housing and labour markets are intertwined, understandably so given increased levels of mortgage debt need to be serviced by borrowers.

Weakening labour market conditions won’t help that, nor the broader Australian economy, particularly at a time when the economy’s transition is yet to be fully cemented.

Here’s the full April monetary policy statement released by RBA governor Philip Lowe.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy have improved over recent months. Both global trade and industrial production have picked up. Labour markets have tightened in many countries. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by higher spending on infrastructure and property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain. The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income.

Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Core inflation remains low. Long-term bond yields are higher than last year, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.

The Australian economy is continuing its transition following the end of the mining investment boom. Recent data are consistent with ongoing moderate growth. Most measures of business confidence are at, or above, average and non-mining business investment has risen over the past year. At the same time, some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest. The various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow.

The outlook continues to be supported by the low level of interest rates. Lenders have recently announced increases in mortgage rates, particularly those paid by investors. Financial institutions remain in a good position to lend. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Inflation remains quite low. Headline inflation is expected to pick up over the course of 2017 to be above 2 per cent. The rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued.

Conditions in the housing market continue to vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades.

Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.

Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

More to follow…

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