For the full picture, download the report: Australian Markets Weekly 17 February 2020

• The Reserve Bank has a renewed focus on financial stability, where the benefit of lower rates in achieving the inflation target and full employment is weighed against the longer-term risk of adding to already-high household debt.  Facing the same issue, the Bank of Canada advocates using macroprudential tools to deal with structural vulnerability of high debt.  At this point, the Reserve Bank is taking a different approach, consciously factoring in stability risks in deciding on rates and favouring a temporary and targeted use of macroprudential policy.
• In terms of financial stability, house prices have rebounded strongly and by more than suggested by the past relationship with interest rates.  New loans have also rebounded strongly, although the recovery in the number of loans is modest, especially when judged against the stock of housing.  Credit growth has likely troughed, but remains weak as households have maintained high repayments despite lower interest rates.
• At face value, this analysis suggests that we are some distance from the Reserve Bank’s “crossover point” where the risks from lower rates outweigh the benefits. However, this interpretation of the data is contradicted by the bank’s own actions, where it has considered cutting rates over recent months and decided to remain on hold.  This revealed preference suggests that the Reserve Bank may be more concerned about financial stability than we think, which underscores the risk that the bank takes longer to cut rates than we currently expect.

The week ahead – AU RBA minutes, wages & labour market; coronavirus

• Australia/NZ.  The minutes of the RBA’s February meeting are unlikely to surprise the market given Governor Lowe’s recent keynote speech and parliamentary testimony. In testimony, the governor said the minutes would again discuss the case for cutting rates, where the Board decided to hold steady as it balanced the risks to easing further.  Australian wages data (Wednesday) and labour market data (Thursday) will be important given Lowe said rising unemployment could tilt the risks in favour of cutting the cash rate.  NAB forecasts unemployment ticked up to 5.2% in January amid a 10k gain in employment, with wages growth steady at 0.5% in Q4.
• International.   The focus remains on the coronavirus with the PBoC expected to trim prime rates by 5bp on Thursday. It is unclear how fast production will be ramped up after the gradual lifting of internal travel bans, although daily pollution levels suggest activity is coming back online. There is a series of US housing releases this week that should show an acceleration in activity.  The FOMC minutes are out and 12 Fed speeches are scheduled, although the Fed seems comfortably on hold for now.  The Nevada caucuses are on 22 February, with the focus on whether Biden can get his campaign back on track. Flash German, French and EZ manufacturing and service-sector PMIs are due Friday.

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