Reserve Bank questions need for recent bank rate rises

The RBA has issued a veiled criticism of recent home loan rate hikes as it released largely positive economic forecasts.

Is the Reserve Bank’s outlook too optimistic?

The Reserve Bank of Australia has launched a veiled criticism of recent home loan rate hikes as it released a fresh batch of largely positive economic forecasts.

With political tensions over the profits of the big banks continuing to simmer, the RBA noted recent rate hikes could not be fully justified by a rise in wholesale funding costs.

“More recently, overall debt funding costs are estimated to have been stable, despite a little upward pressure from the increasing share and cost of long-term debt and deposit funding,” the Reserve Bank noted in its quarterly statement on monetary policy.

The commentary conceded an increase in bond yields may have put a “little upward pressure on banks’ funding costs”, although the jump in some lending rates could only “partly” be explained by this rise.

Australia’s big four banks most recently went through a significant rate rising cycle in December, although this targeted housing investors to the exclusion of almost all else.

The impact has already been felt, with investor financing sliding 1 per cent in December after seven straight monthly rises.

The RBA did, however, welcome a reduced reliance on offshore markets by the major banks, noting deposits had now risen to 60 per cent of funding.

This heightened reliance on deposits likely contributed to margin pressure earlier in 2016 given the banks did not cut rates in full for depositors, the RBA suggested, although costs were seen steady at the time of the December rate tweaks.

“Estimates of the average cost of the major banks’ debt funding declined over 2016 but by a little less than the cash rate, mainly reflecting incomplete pass-through of the cash rate reductions to term deposit rates,” the RBA said.

“Overall, deposit funding costs are estimated to have been stable in recent months.”

The central bank largely left inflation and growth numbers as they were in November, although the 2016-17 fiscal year GDP outlook was trimmed given a shock red reading in the September quarter.

For calendar 2017, the GDP growth forecast remained at 2.5 to 3.5 per cent, although it was lowered 25 basis points to 2.75 to 3.75 per cent for calendar 2018.

Inflation projections were untouched at a range of 1.5 to 2.5 per cent for both 2017 and 2018.

However, the RBA has tipped a return to trend price growth from fiscal 2019, when core and headline inflation is forecast in a range of 2 to 3 per cent. This was the first time a fiscal 2019 forecast had been released.

The outlook is crucial as it suggests the central bank believes it is on track to return the inflation rate to “normal” levels within two years.

Inflation was seen at a 1.5 per cent annual rate in 2016.

The central bank’s unemployment forecast showed a 5-6 per cent reading for the coming two years, although the chart accompanying the forecast indicated the jobless rate would likely hold a little higher than it expected just three months ago.

The slight change is little surprise given an unexpected uptick in the unemployment rate to 5.8 per cent near the end of last year.

Capital Economics chief Australian economist Paul Dales questioned the outlook, suggesting the RBA outlook may be too optimistic in a trend view.

“The statement on monetary policy shows that the RBA is almost assuming that the economy performs perfectly over the next few years,” he said.

“This rarely happens and our view is that GDP growth and inflation are more likely to be weaker than the RBA expects.”