The RBA’s message on debt

In today’s Minutes of the March 2011 Monetary Policy Meeting, RBA members had something of a coming out:

The household and business sectors in Australia did not appear to be under financial stress, though both continued to show more caution in their borrowing behaviour, as evidenced in slower rates of credit growth over the past couple of years. Members saw this as a welcome development, particularly as household debt remained at a historically high level and debt-servicing requirements had recently increased with the rise in interest rates.

Members have been a little inconsistent on this point in recent days, with Governor Glenn Stevens far more sanguine about debt in a recent London speech, as described by the Unconventional Economist at the time. The positive spin was perhaps designed for an audience of offshore investors but in the age of the internet really just risked inconsistency.

Anyway, it’s pretty clear now. The RBA does not want you to leverage up and will punish you if you do. In light of this, the RBA should consider altering Glenn Stevens’ Statement on Monetary Policy slightly as well. For months the statement has included the following:

Asset values have generally been little changed over recent months and overall credit growth remains quite subdued, notwithstanding evidence of some greater willingness to lend.

The expression “overall credit growth remains quite subdued” suggests that growth is below some implied ‘normal’. If the RBA wishes to encourage the public’s new debt-conservatism then can I humbly suggest they finesse the wording.

As for the story from the minutes that is being reported across the media, that rate cuts are suddenly off the agenda, will not be news to regular readers.

David Llewellyn-Smith

Comments

  1. From AAP:

    “Total personal finance commitments fell 9.5 per cent in January, seasonally adjusted, to $6.895 billion, down from $7.619 billion in December, the Australian Bureau of Statistics (ABS) said on Tuesday.

    Total commercial finance fell 5.8 per cent in January, seasonally adjusted, to $30.938 billion, down from $32.827 billion in December.

    Lease finance was down 1.3 per cent in January to $434 million, compared with $439 million the month before.

    Housing finance for owner occupation was down 4.6 per cent to $13.959 billion in January, from $14.630 billion in December.”

    Queue……spin.

  2. Have to say the RBA’s preoccupation with the price of Bananas in the latest minutes is comical to say the least.

    At a time when almost unprecedented prices rises in housing, utilities, health care and other essentials are being felt, the boffins get wound up about a banana led 0.5% temporary increase in CPI.

    All this within the landscape of a once in a lifetime boom as they themselves put it. Talk about a loosening bias.

  3. “At a time when almost unprecedented prices rises in housing, utilities, health care and other essentials are being felt”

    Yep! Inflation being held in check by lower imported prices. The lower imported prices has now stopped and IMO has reversed. We will import inflation. Higher inflation, higher interest rates? If higher interest rates how does our current debt level look?
    No one in RBA or anywhere for that matter seems willing to talk about what happens if things do no not turn out EXACTLY as we HOPE!

  4. Flawse, I’m pretty sure the RBA knows that if interest rates go up even another 50-100bps, the retail sector will collapse and unemployment will follow, heading to the 7-8% region FAST.

    Then the housing bubble goes from there.

    Its not rocket surgery – if interest rates go up any further, the consumer economy will choke itself to death.

    I can’t see another interest rate hike for at least 12 months – if ever again.

    Time to lock in your term deposits.

    • I keep asking this question of others who might be smarter than me. Can or WILL he RBA simply ignore inflation?
      Will the RBA’s charter be changed to some other priority than price stability?

  5. Prince
    I agree RBA will WANT to decrease rates but will they be able to?
    In addition, if things deteriorate a bit and the dollar starts to fall, even an interest rate hold may produce bedlam.
    As to locking in term deposits I may not have much spare dinero to lock in. I’ve been losing fingers trying to pick up those pennies in front of the steam roller!