Economy Booms, RBA Ready to Wind Back the Pump

By Glenn Dyer | More Articles by Glenn Dyer

The Reserve Bank will keep the key cash rate steady at 10 basis points (0.10%) but has started moving to cut the size of its support packages for lending and the economy to accommodate the strengthening conditions.

In the usual statement issued after Tuesday’s monetary policy meeting, Governor Philip Lowe also again reiterated rates are unlikely to rise before 2024.

But his post-meeting statement revealed sharp upgrades to growth and jobs forecasts for the next year or so, with inflation now seen a touch higher because of the faster pace of activity in the economy.

This faster path of growth and a healthy financial system has seen the RBA decide to end one of its key support measures for banks and other lenders – its Term Funding Facility.

It will not be extended beyond the end of the current financial year. This gives banks until the end of June to draw down on the first $100 billion. A second $100 billion is still available until the end of June this year. Loans made under the TFF end in 2024.

Dr Lowe said that the bank still intends deciding at its July meeting if it will shift its three-year yield curve target from the April 2024 bond to the November 2024 bond, and discuss whether to extend the current $100 billion bond purchasing program.

“The Board is not considering a change to the target of 10 basis points,” he made clear yesterday in yesterday’s post meeting statement.

“At the July meeting, the Board will also consider future bond purchases following the completion of the second $100 billion of purchases under the government bond purchase program in September. The Board is prepared to undertake further bond purchases to assist with progress towards the goals of full employment and inflation. The Board places a high priority on a return to full employment,” Dr Lowe said.

Governor Lowe also said inflation remains below the central bank’s targets, but employment growth has been strong. The RBA now expects to see economic growth of 4.75% in 2021 (up from 3.5%) and 3.5% in 2022 (unchanged), and an unemployment rate of 4.5% in late 2022, down from 5.5%.

As for inflation, that may peak at 3% (as he has said previously) in the current quarter then fall to 1.5% in 2021 and 2% in mid 2023 (2021’s forecast unchanged and 1.5% in the February forecasts.

Mr Lowe again said the bank would be monitoring lending standards given the recent growth in housing prices.

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Two top tier data sets from the Australian Bureau of Statistics reveal the continuing buoyancy of Australian economic activity as it emerges from the Covid lockdowns and restrictions.

On the one hand lending finance for housing hit new highs in March, but on the other side, the trade surplus for the month tumbled to a four-month low.

The loss of income from inbound tourism and overseas students having a small impact but the real killer has been the drop in goods exports in recent months, and especially over the past year.

That fall is despite continuing high iron ore prices, the recovery in oil and LNG prices, near record copper prices and buoyant wool meat and cereal prices (and volumes for the rural products in the wake of the ending of the drought).

After revealing a monthly merchandise trade surplus for March of more than $US8.1 billion, the Australian Bureau of Statistics yesterday revealed the full surplus for the month had tumbled to $5.57 billion.

That was more than $2 billion less than the $7.59 billion recorded in February and a massive $4 billion under the $9.5 billion in January.

That was after exports fell 2% or $681 million to $38.274m and imports rose 4% or $1.340 billion to $32.700 billion.

A year ago, at the start of the pandemic-driven slump in the economy and imports, the March trade surplus surged to more than $10.6 billion.

So the fall over the year has been almost 50%.

The culprit for the fall, according to the trade data yesterday and last week was non-monetary gold (imported to be processed and then exported), according to AMP’s chief economist, Shane Oliver.

“Exports fell 1.7%, reflecting a 25% decline in non-monetary gold exports,” Dr Oliver wrote on Tuesday.

“Excluding this exports would have risen on the back of strong exports of iron ore and non-grain exports offsetting a fall in wheat and coal exports.Imports rose 4.3% with a broad based increase.”

Dr Oliver said that Net exports are expected to detract around 1.5 percentage points from March quarter GDP growth with export volumes estimated to be down and import volumes up. Despite the month-to-month volatility, trade surpluses are expected to remain solid.”

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Meanwhile, ABS figures on Tuesday showed new housing loan commitments 5.5% in March 2021 (seasonally adjusted) to a new record high of $30.2 billion as more and more investors moved back into thew market.

In fact the ABS data shows that lending to investors accounted for more than half of the March rise in housing loans.

The value of new loan commitments for investor housing rose 12.7 per cent to $7.8 billion in March 2021 (seasonally adjusted), 54.3% higher than in March 2020 which is understandable given that March last year is when the recession started thanks to the pandemic-driven lockdowns and closing of the borders.

ABS head of Finance and Wealth, Katherine Keenan, said on Tuesday that: “Investor lending has seen a sustained period of growth since the 20 year low seen in May 2020.

“The rise in March is the largest recorded since July 2003 and was driven by increased loan commitments to investors for existing dwellings.”

“The value of new loan commitments for owner occupier housing rose 3.3 per cent to $22.4 billion in March 2021, 55.6 per cent higher than March 2020. This rise was driven by an 8.8 per cent rise in the value of loan commitments for existing dwellings.”

The value of owner occupier loan commitments for the construction of new dwellings fell 14.5 per cent, the first fall since the HomeBuilder grant was introduced in June 2020. The HomeBuilder grant was cut from $25k to $15k effective from 1 January 2021.

Dr Oliver says the rise in interest from investors will see further rises in house prices.

“The resurgence in investor financing and the continuing surge in owner occupiers who are trading up points to further near-term strength in home prices. It also points to a further acceleration in housing debt, a further rise in the share of interest only loans and increasing lending at high loan to valuation ratios.

“All of which is increasing pressure on the RBA and APRA to move to tighten lending standards in order to head off increasing risks of financial instability – which we expect to occur sometime in the next six months,” Dr Oliver said in a note Tuesday afternoon.

 

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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