Higher-than-average mortgage repayments not enough to sway Board
The Reserve Bank of Australia (RBA)’s decision to increase the cash rate to 3.85% in February came down to a simple equation: Was there enough restrictiveness of financial conditions in Australia?
Given the unanimous decision to raise rates by 25 basis points, the answer was a resounding no, apparently.
In Minutes of the Monetary Policy Board Meeting published this Tuesday, the Board highlighted that housing credit growth “had picked up noticeably” and now appeared to be “growing faster than household incomes, driven by a pick-up in investor credit”.
Business debt also maintained a strong trajectory in recent quarters, growing at its fastest pace since the global financial crisis and faster than GDP.
Members discussed tight labour conditions, with the unemployment rate remaining “lower than expected”.
These and other factors cumulatively led to policymakers deciding that a bit more restrictiveness in the financial system was the right course of action.
Yet it wasn’t a slam dunk.
Members noted that mortgage repayments as a share of disposable income remained above the historical average, with households making larger repayments into redraw and offset accounts.
“This behaviour – amid a high rate of household savings compared with the preceding few years – could have been consistent with policy still being somewhat restrictive,” said the Board. “However, members also explored whether this additional saving might instead have reflected unexpectedly strong income growth, which households could, in due course, choose to spend.”
Since the cash rate hike, all major banks have moved to pass it through to customers.
Commonwealth Bank, ANZ and NAB raised variable rates by 25 basis points on 13 February, while Westpac held off until 17 February. Macquarie will pass the hike through on 20 February.
Board mulled 3.6% hold
Policymakers weighed up the benefits of holding rates at 3.6%, namely allowing the Board to accumulate more evidence before committing to a rate rise, “an approach that might be appropriate if members judged the increase in inflation to be overwhelmingly temporary and likely to dissipate quickly”.
But ultimately, “these observations led members to conclude that excess demand was unlikely to be corrected if the cash rate remained at 3.6%.
Banks diverge on rate outlook
“The minutes of the February Monetary Policy Board meeting highlight the fundamental reassessment that has taken place over recent months at the RBA,” said Commonwealth Bank’s head of Australian economics Belinda Allen. “From here we expect the RBA to be highly dependent on the data flow to corroborate the reassessment of the models."
CBA expects the RBA to lift rates again in May.
“Our own view remains that the RBA is likely to end up (marginally) pleasantly surprised on the inflation front,” said ANZ’s head of Australian economics Adam Boyton. “We also think that a likely slowing in real household income growth, the current low level of consumer confidence, and the fall in household spending in December, all point to a weaker consumer heading into the May meeting.”
ANZ expects the cash rate to stay put at 3.85% for the remainder of 2026, “although we acknowledge the data need to fall on the softer side to give the RBA Board comfort”, added Boyton.
Among the other major banks, Westpac and NAB also see the cash rate going up in May.
