My guess is that the RBA is going to get ahead of the curve on rates, pronto. This is all about its 'modal' expectations. Unlike everybody else, risk management for the RBA is all about booms rather than busts (at least most of the time). The downside scenarios can be promptly dealt with by reducing rates given that most of us have variable rate loans.
Two quick thoughts regarding the Board Minutes that were released today. The first was that the RBA's "cautious consumer" story has started tearing apart at the seams before it had any serious traction, as I expected. The last thing holding it together is the impressive housing credit chapter, but that is unlikely to last long with rates on hold. There is ample evidence that lenders are now relaxing otherwise austere credit standards to drive their mortgage book growth, which has been incredibly weak.
Thus the RBA will have to opt for Plan B, which is to force caution on consumers through a bit of libertarian paternalism, otherwise known as autocratic rate hikes. The RBA's tattered consumer narrative was highlighted as follows:
"Members discussed trends in the household sector, where there was some evidence to suggest that the cautious approach to spending seen over recent times could be starting to wane. While retailers continued to report that conditions were challenging, retail spending had picked up in recent months and the national accounts measure of consumption was surprisingly strong in the June quarter. This strength was, however, partly a reflection of a boost to spending on motor vehicles following damage from hailstorms in Victoria and Western Australia. Consumer confidence was at high levels and labour income growth had been solid. In contrast, the household sector's reduced appetite for debt was continuing, with housing credit growth easing over recent months and repayments of credit card debt picking up."
Aside from repeatedly flagging the risk of inflationary pressures, the other interesting aspect of the Minutes was the deliberate defence of the housing and mortgage markets, which was expected given the silly assaults on both sectors by the hedge funds hordes and assorted vested interests:
"The Australian banking system continued to be in a relatively strong condition...The rate of non-performing assets appeared to have stabilised, and was at a level far below the peak following the early 1990s recession, with significant write-backs of earlier provisioning now occurring as asset quality improved. The earlier pick-up in non-performing assets had been mostly in business lending, and non-performing loans to the household sector were relatively low. Members noted that non-performance rates for housing loans were far below those seen in the United States and some European countries.
The aggregate financial position of the household and business sectors remained sound, with the stronger economy boosting wage incomes and profits. Indicators of financial stress in the household sector remained low compared with previous downturns and international experience. Households appeared to be taking a more cautious approach to their finances, with the household debt-to-income ratio broadly stable over the past few years, after a decade when it grew rapidly. Banks had also taken a relatively cautious approach to lending in the post-crisis environment, with a significant fall over the past year in the proportion of new housing loans with loan-to-value ratios over 90 per cent."
