RBA Very Data Dependent While Uncertainty So High

The RBA Assistant Governor Kent has spoken on the “Channels of Transmission”. He gave details on how monetary tightening feeds through to the economy. His comments on the central bank’s monetary stance were consistent with the latest meeting statement including that “some further tightening” may be needed and the RBA remains very data dependent.

• The 400bp increase in the OCR has fed through into not just mortgage rates but also business rates, funding costs and 3m BBSW rates. Around 75% has been passed on to deposit rates, higher than many other countries.
• Kent reiterated that monetary policy is working and that there are currently wide bands of uncertainty. The bank is hearing that retailers are discounting due to slower demand. It will only become concerned about higher oil prices if they persist and feed into inflation expectations.
• The RBA estimates that “the 4 percentage point increase in the cash rate target since May 2022 will have reduced overall household spending by around 0.4–0.8 per cent per year through the cash-flow channel” and that business capex would be 4% lower than baseline over 2-3 years.
• Australia’s cash flow channel works faster than other countries, such as the US, due to a higher share of variable rate loans. Since May 2022, household mortgage payments have risen to almost 10% from 7% of disposable income compared with 7.25% at the 2008 peak.
• “Each 1 per cent decline in wealth results in a fall in consumption of around 0.1–0.2 per cent” but in the Q&A Kent said that the RBA is currently not concerned about rising house prices due to other factors pressuring households, including tighter credit - “the borrowing capacity for a typical household” is 30% lower than in May 2022. Also only half of mortgages have been rolled off fixed rates with the rest to occur over the next year. So policy lags are still in play.