Reserve Bank to weigh 'trifecta' of risks this Melbourne Cup day

Reserve Bank to weigh 'trifecta' of risks this Melbourne Cup day

A trifecta of falling home prices, sluggish wages growth and high household debt will dominate discussion at Tuesday’s Reserve Bank board meeting.

The Treasurer, Josh Frydenberg, will also meet with the board on Melbourne Cup day to discuss the trio of issues, it is believed.

But Governor Philip Lowe will not stop the nation’s unprecedented run of record low interest rates when he announces the board’s decision at 2:30pm, economists say.

Not since 2011 has the central bank interrupted annual racing festivities by altering its official cash rate. Prior to that, the Reserve stole the spotlight by moving rates – either up or down – for six years in a row on Cup day.

RBA Governor Philip Lowe faces concerns about rising household debt.

RBA Governor Philip Lowe faces concerns about rising household debt.Credit:Dominic Lorrimer


The central bank is, however, preparing to slash its forecast for the nation’s jobless rate when it releases a highly anticipated quarterly update on the state of the economy on Friday.

After a surprise drop in the jobless rate in September to 5 per cent – economists’ best guess of the rate below which wages growth should start to pick up - the Reserve is expected to trim its existing end-of-year forecast of 5.5 per cent. Previously, the bank had not pencilled in a return to a 5 per cent rate until December 2020.

But weaker than expected inflationary pressures are expected to stay the central bank’s hand for yet another month, bringing to 27 the number of consecutive months the central bank has left rates on ice.

The Reserve Bank has resisted calls for more interest rate cuts due to its concerns about rising household debt levels.

At its last meeting, the board agreed that its next move was “more likely to be an increase than a decrease”.

Tony Morriss, an interest rate strategist at Merrill Lynch Australia, said the adjustment in the housing market so far did not constitute a “crash” and that household debt levels remained “worrying”.

“The RBA actually lifted rates in the face of a similar correction centered on Sydney in 2003,” Mr Morriss said. “An orderly decline is welcome. The RBA will be watching, but would not change course as household debt levels are a key macro risk & the jobs market is firm.”

Wages hold the key to future policy moves, according to Westpac chief economist Bill Evans.

“If wages don’t pick up, incomes can’t pick up. Spending won’t be picking up and, of course, leverage in the household sector can’t be reduced by a slowdown in incomes.”

Wages will take centre stage next Wednesday when the Bureau of Statistics releases its wage price index for the September quarter. It is expected to show some uptick in wages thanks to retail sector agreements and the 3.5 per cent minimum wage increase.

But Evans says Australia’s jobless rate may need to fall to 4.5 per cent before wages growth starts to pick up: “What we’re seeing around the world is wage pressures really only start to emerge now at levels of unemployment well below previous levels.”

Evans expects the Australian economy to slow next year, as home construction slows and lower home prices weigh on consumer spending and confidence.

“It’s clear that housing construction is going to be a drag on growth next year and I don’t think the Reserve Bank’s expecting that. We also expect that falling house prices will impact upon the consumer whose savings levels are now very, very low. “

The upcoming federal election could also impact confidence, Mr Evans said. “We’ve noticed in previous election periods, things tend to slow down in those months leading up to the election, and then after the election when people worry about what the new policies are going to look like.”

Most economists expect interest rates to remain on hold this year and next.

But HSBC Australia chief economist Paul Bloxham expects interest rates to be half a percentage point higher by Christmas next year.

"Inflation is past its trough and, with the labour market continuing to tighten and firms indicating increasing skills shortages, we expect wages growth and inflation to pick up in the coming quarters."

Single digit home price falls would not be enough to derail an economic recovery fuelled by a lower Australian dollar and higher commodity prices," Mr Bloxham said.

"There are, as yet, few signs that this is having any tangible effect on the broader macro-economy. It remains a risk that it will – but, while jobs growth remains strong, we expect consumer spending to remain solid."

Jessica Irvine is a senior economics writer with The Sydney Morning Herald.

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