“In the context of high household debt, currently weak income growth and falling house prices, the resilience of consumption growth is a key uncertainty for the overall outlook,” the RBA said.
It was these concerns that caused the bank to drop its earlier prediction that the next move in interest rates would be up, instead stating the prospect of a cut was now equally likely.
‘Incredibly dovish tilts’
The RBA joins other global central banks in backing away from tightening policies amid concerns about global and domestic risks.
“The spin across the central banking community has been incredibly dovish tilts, incredibly quickly,” said Charlie Jamieson of $2 billion bond fund JCB.
“There is a huge shift in that community because they foresee something that worries them.”
In shifting to a more neutral stance, the RBA joins the US Federal Reserve, Bank of England, Bank of Canada and the Bank of India in moving towards more accommodative policy settings.
Global equity markets have been boosted by the reinstatement of the so-called “central bank put”.
Australian stocks experienced their best week since November 2016 as the S&P/ASX 200 index rallied 3.6 per cent to 6071.50 by Friday night. The index crossed the 6000 level this week for the first time since last October.
The Reserve Bank released its statement of monetary policy on Friday. Louie Douvis
The monetary policy shift weighed on the Australian dollar. The currency lost 2.4 per cent against the US dollar to trade at 70.73¢ on Friday afternoon.
The decline marked the weakest week for the currency since November 2016.
A slew of weak global economic data in Europe and Asia has forced several central banks to reconsider tightening monetary policy or shift towards easing conditions.
The rising threat of a global downturn coincides with a potentially bumpy period for the Australian economy with households grappling with high debt levels, relatively sluggish incomes and declining wealth.
‘It may get disorderly’
“The Aussie battler is finally deleveraging. It’s orderly now but it may get disorderly,” Mr Jamieson said.
Mr Jamieson, who has maintained that the central bank would not hike interest rates, said the RBA was most likely concerned about a slow down in housing construction and the potential impact of employment in that sector.
“It might be government infrastructure [that creates future work] but if it is not there is an obvious bottleneck.”
Dr Lowe said on Wednesday residential construction activity was currently around its peak level and the large pipeline of approved projects was expected to support activity for a while.
“Developers, though, are finding it more difficult to sell apartments off the plan, and lenders are less willing to provide finance,” Dr Lowe said.
UBS economists said that based on analysis of Seek job advertisements and historical data relationships, 50,000 construction jobs could be lost, representing about 0.4 per cent of employment.
“Given the recent collapse in building approvals, we believe there is still downside risk,” UBS noted.
The RBA said it was surprised that quarterly household consumption growth was lower in the three months to September 30 even as incomes increased and jobs were added to the economy.
The outlook for consumption growth, it said, would “hinge on household income growth picking up, and by enough to offset households responding to falling house prices by reining in their spending”.
The bank warned that weakening household consumption growth posed a risk to the economy as it lowered its 2020 consumption growth forecast by a quarter of a percentage point to 2.75 per cent.
“Consumption has thus far been resilient to measured weak income growth which has been absorbed through a lower rate of saving. This is less likely in an environment where net household wealth is declining.”
On Tuesday, the Reserve Bank maintained the cash rate at 1.5 per cent. The rate has not moved since August 2016.
Until this week, the bank had stated that, while it had no intention to move the cash rate in the near future, the next move in interest rates was more likely to be up as a stronger labour market forced wages and inflation higher.
‘We cannot be complacent’
But on Wednesday Dr Lowe said it was now equally likely the cash rate could be cut.
“If there were to be a sustained increase in unemployment and a lack of progress in returning inflation to target it might be appropriate to lower the cash rate,” the statement said.
The Reserve Bank’s revised economic forecasts confirmed that it had lowered its GDP growth outlook for 2019 from 3.3 per cent to 3 per cent. The Reserve Bank also slightly lowered its trimmed mean inflation forecast for 2020 from 2.2 per cent to 2.1 per cent.
Asked about the RBA downgrades, Treasurer Josh Frydenberg said the economy was in a “good healthy” position but admitted there were some “challenging global headwinds” such as the US-China trade tensions.
Mr Frydenberg said Dr Lowe had confirmed the labour market was “strong” and wage growth was picking up.
“We cannot be complacent about the Australian economy,” Mr Frydenberg said.
He recommitted to forecasting a budget surplus for 2019-20 in the April 2 budget.
Labor’s shadow treasurer Chris Bowen said the growth downgrade was a “major blow to the Liberal Party’s claim of good economic management”.
“Federal Labor has been warning about concerns with the global economy and the consumption effect of falling house prices across the country for months now,” Mr Bowen said.
The quarterly statement confirms that pace and extent of the property market has forced the Reserve Bank to become more dovish, and revise its previously stated expectation that the next interest rate move will be a hike.
Prices falling further
The RBA noted a sharp decline in building approvals and said developers told them that it had become difficult to finance apartment projects and attract sufficient pre-sales to proceed.
“Dwelling investment could therefore tail off sooner and faster than earlier projected.”
The decline in house prices, the RBA said, was affectingdwelling investment but it said it was uncertain about the timing and magnitude.
The risk it said was that investment “declined sooner and by more than currently forecast” it would have “flow on effects” for jobs and household income.
“Very weak conditions in the earlier stages of residential development identified in business liaison point to further downside risk to dwelling investment in 2020 and beyond.”
The central bank also pointed out that rental vacancies had increased in Sydney while rental growth had also slowed.
Earlier this week, Dr Lowe said he expected Sydney house prices would fall further on account of the weak rental market.
“The implications of the housing market correction for the broader economy depend on how households respond, including how they take previous price increases into account in their spending decisions,” the statement said.
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