RBA to avoid quantitative easing: Fitch

Fitch Ratings predicts the Reserve Bank of Australia will avoid resorting to quantitative easing.

Household debt, interests rates and what the RBA might do next.

While affirming Australia’s “AAA” Long-Term Foreign-Currency Issuer Default Rating with a stable outlook, the international ratings agency, Fitch Ratings, said it now expects the RBA to keep its cash rate at the current record low of 0.75 per cent through 2021 to support economic growth and employment, but “does not anticipate the use of quantitative easing” (asset purchases by the central bank).

It comes after The Australian reported on Saturday that federal cabinet has discussed Treasury advice about the Reserve Bank launching an unprecedented program of quantitative easing as the government’s key economic department privately warns Australia is “closer than we have been previously” to requiring unconventional monetary policy.

Still, Fitch warned that the inflation rate – targeted by the RBA – will remain below its 2-3 per cent target band through 2021.

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While growth should rise to 2.3 per cent pace in 2020 after slowing sharply to 1.7 per cent in 2019, there are downside risks.

“We expect economic growth to rise to 2.3 per cent in 2020, as the housing market stabilises and consumption is supported by recent monetary policy-rate cuts, tax cuts, and public-infrastructure spending,” Fitch said. “Risks are tilted to the downside given US-China trade frictions and slowing growth in China, as China is the destination of roughly 30 per cent of goods exports.”

Fitch also predicted an acceleration in house price growth in 2020 due to RBA rate cuts and a relaxation of macroprudential policy, which have helped stabilise house prices after an 8.4 per cent fall in the national house price index from the October 2017 peak to June 2019.

While housing turnover is still subdued and mortgage credit growth remains low - in part due to the tightening of underwriting standards - housing-loan approvals have increased in recent months and sustained low interest rates, along with continued strong net migration, will put upward pressure on house prices and household debt over the medium-term, Fitch noted.

But Australia’s household debt – at 191.1 per cent of disposable income in the June quarter of 2019 - is “among the highest of ‘AAA’ rated sovereigns and poses an economic and financial stability risk in the event of a shock”, the ratings agency warned.

“Under current conditions, households appear well positioned to service their debts, with non-performing loans at just under 1 per cent of total loans. However, a labour market or interest rate shock could impair households’ ability to service their debts.

Mitigating these risks is that some households have prepaid their mortgages or maintain mortgage offset accounts that can be used to service debt in the event of a shock, though newer borrowers and financially weaker households could be vulnerable.”

But Australia’s banking system, which scores ‘aa’ on Fitch’s Banking System Indicator, is “well positioned to manage potential shocks”.

“Sound prudential regulation and ongoing strengthening of underwriting standards have improved the resilience of bank balance sheets and limited their exposure to riskier mortgage products,” Fitch said.

Australia’s net external debt remains among the highest within the ‘AAA’ category and is forecast to hit 56.4 per cent of GDP in 2019.

“Heavy reliance on external funding leaves Australia exposed to shifts in capital flows,” Fitch said.

Most external liabilities are denominated in local currency or hedged to reduce currency and maturity mismatches, helping mitigate risks.”

It also cautioned that the improved terms of trade caused by high commodity prices - which led to Australia’s first current-account surplus since 1975 in the June quarter – will be “short-lived” as iron ore prices have declined from their mid-year highs.

Fitch expects the current account for the full year to be roughly in balance, against a deficit of 2.1 per cent of GDP last year.

The current-account deficit of 1.5 per cent of GDP is forecast by 2021, below its 4.1 per cent average since 1990.