RBA Minutes: Monetary Policy Meeting Reserve Bank Board 1 June

Key points from the minutes of the RBA’s monetary policy meeting on 1 June 2021.

Inflation

• In discussing recent developments in global inflation, the RBA noted that global supply chain bottlenecks and higher commodity prices had contributed to an increase in producer price inflation in a number of countries. However, increases in wages and other production costs, which are key components of the overall cost base for many firms, had generally been more subdued.
• The RBA noted that, in the short term, year-ended headline inflation was expected to rise temporarily around the middle of the year, owing to base effects and temporary price pressures as global supply chain bottlenecks and higher commodity prices drove consumer prices up. However, in most advanced economies, including Australia, spare capacity in labour markets was likely to contain underlying inflationary pressures for some time.

Housing

• Despite historically low population growth, residential construction activity was expected to strengthen further over coming quarters, supported by government incentives, low interest rates and the very high level of building approvals over prior months.
• Prices in the established housing market increased further in May. New residential listings had been above the levels recorded in previous years, but the total number of outstanding listings remained low, indicating that properties continued to be sold quickly. Auction volumes and housing turnover had also picked up strongly over recent months, and auction clearance rates remained above average. Rental market conditions had continued to tighten outside of Melbourne and Sydney, with advertised rents increasing rapidly in regional areas and some capital cities. In Sydney, advertised rents had been increasing again after declining earlier in the pandemic. In contrast, rental market conditions remained weak in Melbourne, where advertised rents remained well below their pre-pandemic levels and the vacancy rate was still high.
• The RBA observed that housing markets had strengthened further, with prices continuing to increase in all major markets. Housing credit growth had increased, with ongoing strong demand from owner-occupiers, especially first-home buyers. Growth in borrowing by investors had also started to increase in recent months, from low levels. Given the environment of strong demand for housing, rising housing prices and low interest rates, they continued to emphasise the importance of maintaining lending standards and carefully monitoring trends in borrowing.

Business

• The RBA welcomed the increase in business investment expenditure in the March quarter, led by machinery and equipment investment, and forward-looking indicators of business investment were more favourable than they had been for some time. Accommodative financing conditions and tax incentives were supporting the recovery in investment.
• In discussing spare capacity in the labour market, they noted that while the participation rate had increased to historically high levels, further increases were possible. The number of people who were recorded as outside the labour force but open to work in the near future was still quite high. Combined with other measures of potential labour supply currently classified as outside the labour force, this suggested there was still a pool of workers available to firms should the demand for labour continue to increase. 

Funding

• The RBA’s bond purchase program had run smoothly, with the second $100 billion of bond purchases scheduled to be completed in September 2021. They noted that they were projected to own around 30 per cent of AGS outstanding and around 15 per cent of bonds issued by Australian states and territories outstanding by that time. 
• Bank funding costs and lending rates overall were at historic lows. Draw-downs on the RBA’s Term Funding Facility had picked up as the 30 June deadline for accessing the 3-year funding program approached. At the time of the meeting, banks had drawn down $134 billion and a significant proportion of the remaining $75 billion still available to banks was expected to be drawn down over subsequent weeks. The RBA noted that the facility is providing low-cost fixed-rate funding for 3 years, which means that it will continue to support low borrowing costs until mid 2024.
• They observed that the their package of monetary policy measures had led to sizeable declines in mortgage rates, particularly for fixed-rate loans. As a result, the share of fixed-rate mortgages had risen to account for around 30 per cent of the stock of housing credit. Housing credit growth had continued to pick up, with ongoing strong demand from owner-occupiers, especially first-home buyers. Growth in credit extended to investors in housing had also strengthened from low levels. Business lending rates had also declined substantially over the preceding year, although lending to businesses had been little changed. Information from liaison with banks suggested that, while businesses’ appetite to borrow had increased somewhat, many businesses had little immediate need to borrow and demand for credit remained uneven.
• Key considerations for the decision in July would be the progress made towards the RBA’s goals for employment and inflation, and the likely effect of different options on overall financial conditions. Observing that the bond purchase program had been one of the factors underpinning the accommodative conditions necessary for the economic recovery, they thought it would be premature to consider ceasing the program.

Climate change

• The RBA discussed the implications of climate change for monetary policy and the RBA’s financial stability mandate through its effects on the economy and the financial system. They noted that, both in Australia and abroad, the private sector had begun responding to climate risks in a number of ways, including by increasing disclosure of climate-related risks and developing ‘green finance’ products. Central banks and financial regulators had been actively accounting for climate-related risks in carrying out their policy and regulatory responsibilities. Domestically, the RBA is working closely with other Council of Financial Regulators (CoFR) agencies on these issues, with a focus on building the foundations for financial institutions and corporations to understand climate risks and for the effective pricing of these risks by markets. The Australian Prudential Regulation Authority’s Climate Vulnerability Assessment is a key CFR initiative that is expected to assist Australian financial institutions with the management of climate risk, and improve the consistency and effectiveness of climate-related disclosures.
• They observed that developments globally relating to the management and regulation of climate-related risk had become increasingly prominent in the asset allocation decisions of international investors. This development could affect the cost and availability of finance for corporations and governments. As a related matter, they observed that taxonomies were being established in a number of economies to provide corporations and investors with a framework to understand whether an activity or financial product is ‘sustainable’. The RBA noted that particular taxonomies could become very influential in global financial markets, and these will have an important bearing on the cost and availability of financing the transition to lower carbon emissions for Australia.

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MinutesMonetary PolicyRBA