The minutes of the RBA Board meeting in early August, released last week show a change in the balance of risks on which the RBA is clearly focussed. A month earlier, the key concluding paragraph noted “developments in the labour and housing markets continued to warrant careful monitoring”. This month, “members regarded conditions in the housing market and household balance sheets as continuing to warrant careful monitoring”. In addition, the August minutes refer to “the need to balance risks associated with higher household debt in a low inflation environment”.
The minutes suggest that three factors still largely determine the path of interest rates; wage growth, consumption growth and financial stability but the strengthening in employment growth means that the labour factor has been removed from that watch list. The RBA acknowledges that the outlook for wage growth is incredibly uncertain, but believes that it will “increase a little as conditions in the labour market improve.”
The RBA’s growing emphasis on financial stability indicates that it won’t want to raise rates too soon or too far for fear of pushing heavily indebted households over the edge. The RBA is balancing both upside and downside risks and that is why any change in monetary policy is a long way off.