There were no policy changes announced or much change in the Governor’s Statement. He did make us aware that the Council of Financial Regulators is closer to adopting some form of macro prudential tightening with loan serviceability buffers being singled out.
As expected the Reserve Bank Board decided to maintain its current policy stance at the October Board meeting.
The Governor’s Statement was particularly short and contained no significant new observations.
GDP in the September quarter is forecast to have “declined materially” .
However the setback is expected to be “only temporary” with the economy expected to bounce back. There is uncertainty about the timing and pace of the bounce- back which is expected to be slower than earlier in the year.
In the central scenario, “the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year.”
That description probably means that the level of GDP will be back at the level which was projected prior to Delta by the second half of next year. However it does not mean that total production over the period is expected to be unchanged. The loss in production during the September quarter is unlikely to be fully recouped by the second half of 2022 although the projected level of activity in the second half of 2022 will still be reached. That has implications for the output gap and associated inflation pressures but these inflation pressures will not be solely determined by demand with unusual supply pressures playing an important role.
The bank’s liaison and data on job vacancies “suggest that many firms are seeking to hire workers ahead of the expected reopening in October and November.”
However the Governor points out that wages and prices remain subdued.
In that regard he notes that underlying inflation is running at around 1.75% and wages increased by “just 1.7%” although this 1.7% was impacted by the COVID affected 0.1% increase in the September quarter last year.
There is an expanded commentary on the housing market.
The Reserve Bank’s Statement on Financial Stability is due to be released on October 8 and this report would have been discussed at the meeting. The Governor notes that The Council of Financial Regulators has been discussing the medium term risks to macroeconomic stability of rapid credit growth. The Governor concludes with the usual “it is important that lending standards are maintained “ but adds it is important “that loan serviceability buffers are appropriate”.
The latter comment refers to the need for lenders to be comfortable that a loan can still be serviced should the loan rate increase by that serviceability buffer. Increasing that buffer would provide a tougher stress test for any new borrowers.
At the moment banks and other regulated lenders must utilise an interest rate buffer of at least 2.5% over the loan’s interest rate.
Finally, the key conclusion that has been consistently used since April 2020 “It will not increase the cash rate until actual inflation is sustainably within the 2-3 per cent target range.” is repeated in this Statement. It is possible that the Governor may have decided to be more specific with that description of the policy approach following a recent speech when he noted“ We want to see inflation around the middle of the target range.”
Conclusion
As expected there was no policy change at today’s Board meeting.
However there was clearly a discussion about the prospect for macro prudential policy with the only “clue” being a consideration of loan serviceability buffers.
There is nothing in the Statement to cause Westpac to change its expectation that an increase in the overnight cash rate of 0.15% can be expected by the March quarter 2023.
