Bill Evans

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As expected the Board of the Reserve Bank maintained its current policy settings, including the targets of 10 basis points for the cash rate and the yield on the 3 year Australian Government bond, as well as the parameters of the Term Funding Facility and the government bond purchase program.

Since the last Board meeting on March 2 the most important economic developments have been the announcement of the surprise fall in the unemployment rate from 6.4% in January to 5.8% in February and reports of extraordinary strength in the national housing market.

The unemployment report has prompted only a minor change in the Governor’s rhetoric from “the economy is still operating with considerable spare capacity and the unemployment rate remains higher than it has been for some years” (March) to “the economy is operating with considerable spare capacity and unemployment is still too high.” (April).

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The key sentiments from March are repeated, “it will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases that are consistent with achieving the inflation target” and “wage and price pressures are subdued and are expected to remain so for some years.”

Rising house prices are recognised, “prices rising in most markets.” But the same approach we saw in March is adopted where lending standards are emphasised, “the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

Importantly the Governor points out that “investor credit growth remains subdued.”

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It is interesting that he did not comment, at this stage, on the recent trend for new lending for housing. In February new lending for investors lifted by 4.5% in the month compared to -0.8% for “upgraders” and -4% for First Home Buyers.

In fact the six month growth rate for new investor finance approvals (31%) is now above the upgraders’ rate (24%) and First Home Buyers (30%). No doubt the Board will be watching these trends very closely.

The commitment to the 3 year bond rate target at 0.1% was confirmed and it was noted that “The Board remains committed to the 3 year government bond yield target of 10 basis points” while noting that “Later in the year it will consider whether to retain the April 2024 bond as the target bond or to shift to the next maturity.” That would be the November 2024 bond – a likely decision which would be supported by the consistent observation that “the Board does not expect these conditions (necessary to increase the cash rate) to be met until 2024 at the earliest.”

Insisting that it will be 2024 “at the earliest” is not consistent with restricting the target bond to an April 2024 maturity.

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As with March the Governor remains supportive of the bond purchase program, “the Bank is prepared to undertake further bond purchases if doing so would assist with progress towards the goals of full employment and inflation.” Note that in the March Statement the Governor indicated his preparedness to extend the policy “if necessary” – the April sentiment seems even more supportive of the bond buying approach.

Since the March Board meeting the AUD has fallen by around US 1.5c but there is no indication of “job done” with respect to the bond buying program which is directly aimed at lowering the AUD (recall that Assistant Governor, Financial Markets, Chris Kent recently estimated that the QE program had lowered the AUD by up to 5%).

Conclusion

Westpac recently confirmed its views that the Bank will extend the new $100 billion bond purchasing program (which is set to begin next week) with a further $100 billion when the new program concludes in the week ending August 27.

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However, we expect that the new program which we expect to begin in the following week will be at a slightly slower pace ($4 billion in purchases rather than $5 billion) so that it can extend into early March. Maintaining the $5 billion pace for the next program would see it concluding in late January requiring the Bank to make an announcement about any future program at the December Board meeting.

We expect that the Board will decide to taper the following program to $50 billion but such a decision will be better made at the February 2022 Board meeting rather than in December when much more information, including the intentions of the Federal Reserve, might be available.

Consistent with the tapering decision we also expect that, having extended the Yield Curve Control policy to target the November 2024 bond, the Board will announce that it is not extending Yield Curve Control beyond the November bond, making the February 2022 Board meeting an important milestone in the Bank’s long road to normalising policy.

Bill Evans is the chief economist at Westpac.
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The Governor’s Statement following the April Board meeting is as expected

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Rising house prices recognised in April RBA minutes: Westpac's Bill Evans

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Having previously forecasted four per cent gains in 2021 in September, Westpac economists have lifted their forecast for dwelling prices and are now expecting 10 per cent gains in both 2021 and 2022.

Westpac chief economist Bill Evans and senior economist Matthew Hassan's expectation is the market will flatten in 2023 as rising fixed-term interest rates combine with prudential measures aimed at reining in the associated lift in leverage.

"These headwinds are not expected to emerge until 2022 with prudential measures likely to be timed for the second half of 2022," Evans and Hassan suggest.

The forecast has Perth leading the way in 2021 with 12 per cent gains, followed by Sydney, Brisbane and Adelaide at 10 per cent. Hobart and Melbourne are predicted to see eight per cent gains, with the latter jumping to 10 per cent over 2022.  

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They say the September forecast of four per cent gains in 2021 was "considered bold", given Victoria was still in lock down.

<img alt="" height="824" src="https://s3-ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/pictures/article-images/dwelling_forecast_westpac_2021.jpg" width="1200">

"The forecast for 2021 incorporated ongoing COVID-related headwinds – particularly around the end of temporary loan repayment deferrals and the impact of closed international borders on migrant inflows," Evans and Hassan continued.

"These headwinds and uncertainties around the pace of reopening and risks of further virus outbreaks were expected to restrain price gains through the first half of 2021.

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"However, the last four months have seen a faster and stronger than expected turnaround, particularly in markets that will see little or no effects from these headwinds. Even in those that are more exposed, demand is looking materially stronger than expected back in September, suggesting momentum will be better sustained.

Evans and Hassan says the upturn is being supported by record low interest rates; the confident expectation amongst borrowers that these rates will remain low for years to come; ample credit supply; and an improving economic backdrop, as the roll-out of vaccines promises to bring the pandemic to an end and drives a sustained lift in confidence.
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Westpac chief economist Bill Evans and economist Matthew Hassan's expectation is the market will flatten in 2023



Joel Robinson

Westpac now forecast 20 per cent dwelling price gains over next two years

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EXPERT OBSERVER
Some economists are concerned about the “wealth effect” of falling property prices. They need not be concerned about that. 
What should concern them is their disturbing lack of knowledge about residential real estate markets. They have misunderstood what’s happening with prices in the many different markets around Australia.
Bill Evans, high-profile economist from Westpac, is one of those who think “falling property prices” will affect consumer spending. He thinks the Reserve Bank will be forced to cut the official interest rate a couple of times this year because of this hypothetical impact of falling property prices.
Mainstream media, as if so often sadly the case, have given great credibility to these forecasts. Journalists have forgotten that Westpac, until last week, was predicting that the cash rate would not change this year and that the next move would be a rise. Now they’ve back-flipped. What does that say about their forecasting?
But the big issue is the lack of understanding about real estate markets. Like most economists, Evans and his cohorts turn their attention to residential property only occasionally, and, when they do, they generalise. They talk about “the Australian property market” and what’s happening with “Australian property prices”. This is a clue that they lack depth of knowledge.
This kind of generalisation is the curse of real estate consumers across the nation. It’s the source of much of the misinformation that permeates mainstream media and which confounds consumers.
Here’s the difference between those Westpac economists and the Hotspotting team: we spend all day, every day, researching residential markets. They do not.
And here’s what I know to be true: locations where property prices have fallen a lot are in the minority. Most markets around the nation have prices that are rising or are holding firm. 
In Hotspotting’s latest location-by-location analysis of sales activity and prices for every suburb and town across the nation, we have identified a number of “danger” markets – those where demand is falling, prices are down and vacancies are rising.
But these danger locations are greatly outnumbered by those where markets are rising. Our national survey finds only 8.5% of locations are negative – what we classify as “declining” or “danger” markets. By comparison, 20.5% of locations are strongly rising. The vast majority – the big lump in the middle – comprises markets where demand is steady and prices solid.
Here's what economists do: they look at a graph or table which describes “Australian property prices”. This is a figure from someone like CoreLogic which provides an average figure for the change in prices for the capital cities. Currently that’s a minus figure because of the weight of Sydney. So they declare that Australian property prices are falling and that this is a national problem.
Apparently, Australians will be so distressed by this that they’ll stop spending in supermarkets and retail stores. It’s a ludicrous proposition.
In Melbourne, only the top end of the market is sharply down. Undoubtedly, the Tooraks of this world have seen prices falling significantly. But Middle Melbourne is remaining very solid price-wise and the cheaper outer-ring suburbs still have rising prices. Most of the suburbs of humble Melton are up by more than 20%.
That’s why most research sources (not including CoreLogic) have Melbourne prices overall down only moderately or, in one case, slightly up.
Meanwhile, Regional Victoria is going ballistic. Geelong, Ballarat, Bendigo, Pakenham, Officer, Warragul and dozens of other regional cities and towns have rising demand and very strong prices.
Hobart prices are still rising and Regional Tasmania is as buoyant as Regional Victoria. Both those regional markets are being supercharged by demand out of Melbourne.
Canberra is rock solid. As I wrote last week, it’s the strongest real estate economy in the nation and it’s doing the opposite to struggling Sydney.
Likewise, Regional NSW. There are growth markets spread right throughout the state. Newcastle and neighbouring LGAs like Lake Macquarie, Port Stephens and the Hunter Region municipalities have formed the strongest market in NSW in the past 12months.
Other important regional centres are rising, including Orange, Tamworth, Byron Bay, Dubbo and many of the smaller towns. Overall it’s a story of growth, in defiance of the Sydney trend.
Those past their best but still solid include Wollongong, Coffs Harbour, Port Macquarie and the towns of the Southern Highlands.
Brisbane overall is not rising strongly with prices, but it’s not falling either – and individual pockets are out-performing. It’s not hard to find suburbs where median prices have risen in double digits in the past year.
The Sunshine Coast is Queensland’s strongest market, with top-end suburbs around Noosa particularly buoyant.
Central Queensland locations are recovering from the previous malaise induced by the mining sector, led by the strategic city of Mackay. Others rising from the previous downturn include Emerald, Rockhampton, Dalby, Chinchilla, Moranbah – and we’re now seeing the first evidence of recovery in Gladstone.
Key regional cities like Toowoomba and Cairns have steady markets. Only time will reveal the real estate impacts from Townsville’s floods.
Adelaide is one of the really solid markets in capital city Australia. Demand is steadily rising and, like Brisbane, the city has individual pockets that are out-performing. There’s no sign of falling values here.
Perth has been in downturn for the past four years, but no longer. All the figures show recovery is under way – vacancies down, rents starting to rise, sales activity trending up and the top-end suburbs showing good price growth.
The only markets of significance where major price decline is prevalent are Sydney and Darwin.
Darwin just can’t escape its malaise because the underlying economy is so weak. The Northern Territory is the only state or territory which failed to deliver population growth last year.
Sydney’s situation is heavily documented but very poorly reported. There are plenty of declining markets and more than a few danger ones. But there are still many markets where demand is solid and prices are resilient.
One situation that media has completely overlooked is the defiant performance of the apartment market. Sydney’s gradual decline, which started back in 2016 long before the royal commission and other distractions that economists think important, was precipitated by the market’s reaction of price levels. Affordability became an issue at all levels of the market. 
So now we have a situation where the cheaper products like apartments are still attracting demand and achieving good prices. Throughout inner and middle ring Sydney, there are many dozens of suburbs where the median house price is sharply down but the median apartment price is strongly up.
So where are all these Australians who are so afflicted by falling property prices that they’re going to hide their money under their beds and not spent. Outside of Sydney (but not all of Sydney) and Darwin, they really don’t exist.
And this is reflected in multiple surveys. The latest Westpac poll shows consumer confidence is up and is specifically not affected by all the negative media about house prices. The ME survey indicated most Australians expect house prices to stay solid or to rise this year and the Momentum Wealth survey found investors are planning to buy, with Perth and Brisbane their No.1 targets.
I think these thoughts from veteran real estate analyst Michael Matusik are also relevant: “It is somewhat sobering to find that the majority aren’t that caught up in all the incessant real estate chat. To most a house is their home and not something that needs a lot of day-to-day analysis or comment. The majority just roll their eyes at the daily house price indices. I am in that crowd.”
I, too, am in that crowd. The media and economists like Bill Evans misinterpret and over-estimate the impact of recent price decline on a relatively small number of Australians.
For most of us, a falling property market is simply not part of our day.
 
Terry Ryder is the founder of hotspotting.com.au
<a href="https://mailto:ryder@hotspotting.com.au">ryder@hotspotting.com.au</a>
twitter.com/hotspotting
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Westpac economist Bill Evans has the property market decline wrong: Hotspotting's Terry Ryder

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EXPERT OBSERVATION
The minutes of the May monetary policy meeting of the Reserve Bank Board repeated the assertion that first appeared in the April minutes. That is that “members agreed that it was more likely that the next move in the cash rate would be up rather than down”. This observation is contingent on the economy evolving in the way the Bank currently expects which is “a gradual pick-up in inflation as spare capacity in the economy is absorbed and wages growth gradually picks up”. Nevertheless the Board observed that spare capacity in the labour market would remain for some time.
Using this terminology might create challenges for the Bank in the future. If the term is ever deleted from the minutes, markets are likely to take that as a sign that the Bank’s policy stance has changed.
Note the “bold” move from the new Governor of the RBNZ (Adrian Orr). He lowered his growth and inflation forecasts and stated, “the Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down”.
The Reserve Bank of Australia however did not lower its growth or inflation forecasts in its recent Statement on Monetary Policy but did make a subtle change in the rhetoric of the minutes, “it would be appropriate to hold the cash rate steady and for the Reserve Bank to be a source of stability and confidence”.
That implies a 'badge of honour' to have steady rates, rather than a stance that needs to be justified in a world where other central banks are tightening policy. Perhaps the lead from the RBNZ, who have recognised the risks around the current environment, has had some impact on their thinking.
The clear positive development for the economy has been the strong boost to non-mining business investment particularly non-residential construction and government public works. The Bank is justified in expecting that this strong momentum will be sustained although in our view at a decreasing pace. We expect that non-residential construction which added 0.6 percentage points to GDP growth in 2017 will gradually reduce its contribution to GDP growth to 0.33 percentage points in 2018 and 0.19 in 2019. Equally we also see government public works spending will also grow but at a slowing pace contributing 0.4 percentage points in 2017, 0.31 in 2018 and 0.23 in 2019.
There remains the concern that wage pressures may take some time to emerge. Indeed Deputy Governor Debelle highlighted a key risk to the Bank’s outlook in his speech on May 15. He nominated that risk as being that the level of the unemployment rate needed to spark wage and inflation pressures might be lower than the Bank’s current unemployment forecast. Note that this is a fairly cautious 5.25% (from current 5.6%) by June 2019 and remaining there through to the end of the forecast period by June 2020.
In fact this forecast represents a downgrade of the unemployment outlook. In the February Statement on Monetary Policy the forecast was for the unemployment rate to fall to 5.25% by June 2018 – a full year earlier than the current forecast. In that sense the Bank has actually downgraded an aspect of its growth outlook. This presumably reflects the slowdown in jobs growth we have seen in 2018 with the four month annualised pace slowing to 1.3% from overall growth in 2017 of 3.4%.
These cautious forecasts of the unemployment rate must indicate that the Bank is aware of the risk that the labour market does not tighten sufficiently to boost wages and other incomes. In fact general estimates of the so-called full employment rate (NAIRU) have been around 5% for Australia. In other countries, their traditional NAIRU estimates have been downgraded in the aftermath of the GFC.
Certainly there is still no sign of any lift in wage pressures. The March quarter wages report printed on May 16.
Total hourly wages ex bonuses rose by 0.5% in Q1 compared to a median of market expectations (and Westpac’s) of 0.6%. This is the second quarter of a disappointing wage print, Q4 WPI rose 0.6% compared to a median expectation of 0.7%. The Q4 print was also revised down to 0.5% from 0.6% as it was originally reported. These modest wage outcomes leave annual private sector wages growth “stuck” at 1.9% despite the 3.3% increase for the minimum wage as determined by the Fair Work Commission.
The Board discusses this prospect when it talks about the wage price index not picking up as quickly as in the past when business surveys identified some shortage of suitable labour. The Board discussion moved to international evidence which shows similar inertia in wages and they discussed possible reasons including competitive pressures from globalisation and technological change. We would add: low productivity growth; falling unionisation; high household debt which constrains job mobility and lack of pricing power generally in the economy. As one employer noted “Why should I grant a pay rise if I cannot compensate with a price rise"?
There may be some source of embarrassment in the minutes in that it is noted that “recent data on retail” suggested that momentum had continued in early 2018. Since the Board meeting, the retail sales report showed that real retail sales had grown by a very modest 0.2% in the March quarter.
This downbeat take on the consumer was further supported by the Westpac Melbourne Institute Index of Consumer Sentiment. The May Report showed a further modest deterioration.
This followed the well-received Commonwealth Budget which included personal tax cuts; savings largely explained by tighter scrutiny of the black economy (few specific losers) and an improved fiscal position. The modest 0.6% fall came as a surprise. It was underpinned by a 6.5% fall in the sub Index (household finances compared to a year ago) and although the Budget boosted confidence in the near term economic outlook, it failed to spark interest in respondents’ assessments of their finances.
In the minutes, there was a more detailed discussion on the outlook for housing. In particular, the Board notes that “a further tightening in lending standards in Australia, particularly in the context of the current high level of public scrutiny of Banks, was possible which would affect household borrowing and spending”. The recent release (since the Board meeting) of housing finance data showing that new lending to investors was now down 26% over the year (and 30% from the peak) is certainly consistent with those concerns.
That clearly signals a slowing in credit growth and the Deputy Governor, in his speech, acknowledges that likelihood. The issues are not only around reduced confidence amongst investors but an impact on the amount of funds an individual can borrow. Deputy Governor Debelle postulates that such a tightening has implications for house prices more than consumption. We do not think that argument is strong. For example note the significant impact on household finances in the Consumer Sentiment survey partly reflecting weaker housing – it is risky to assume little wealth effect when prices fall just because it seems to be muted when prices rise.
The Deputy Governor does address the issue of the implication for a fragile housing market if the RBA raises rates. He notes that an environment where rates are rising would “highly likely to be one where wages and household incomes are growing faster than currently, improving the ability of households to afford higher mortgage payments.” That is a reasonable argument and does demonstrate that the Bank is mindful of the impact of increasing rates on a fragile housing market.
Westpac continues to expect that the Bank’s policy of “stability and confidence” (rates on hold) will be maintained throughout 2018 and 2019.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA approach backed up by wages and confidence data: Westpac's Bill Evans

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EXPERT OBSERVATION
The Reserve Bank Board decided to leave the cash rate unchanged at 1.5%.
We have been interested to follow the various descriptions of the Bank’s growth forecasts over the last few months.
These have ranged from “a bit above 3%”; “central forecast remains for faster growth in 2018”; “growth above trend”; and today, “Growth to pick-up to average a bit above 3% in 2018 and 2019”.
In our preview of the SoMP, we speculated that the forecast would be modestly shaved to 3% in 2018 and 3 ¼% in 2019.
That would still be consistent with an average slightly above 3% and seems more likely than the 3 ¼%, 3 ¼% which was in the February SoMP. 
In its MYEFO in December the government forecast growth of 3% in 2018/19 and 2019/20 compared to 3.25% for the RBA. In 2018/19 and 2019/20 .
The Bank may choose to “go half way” given it is unlikely the government will change its forecasts in the Budget on May 8.
The other interesting forecast in the May SoMP will be underlying inflation in 2018. In February, the forecast was 1.75%, below the 2-3% target band and following 1.6% in 2016 and 1.8% in 2017 – hardly a vote of confidence in the 2-3% target band.
Commentary in this statement is the same as we have consistently seen with the recent inflation report being described as “in line with the Bank’s expectation”.
That would tend to suggest that it will remain cautious around the inflation outlook and forecast 1.75% for 2018.
Given that the trimmed mean printed 0.5% for the March quarter, the implication is that the Bank does not expect any marked lift in the quarterly pace through 2018.
In the minutes to the April meeting, the Board noted that it was more likely that the next move in rates will be up rather than down.
That sentiment was not in the Governor’s statement in April and did not figure in this statement. In fact, the final paragraph in the May statement is exactly the same as the final paragraph in the April statement.
Commentary in previous statements around the labour market has been unreservedly upbeat. It was therefore interesting to note that the Governor recognised that employment “growth has slowed over recent months”.
Nevertheless, the Governor remains confident that solid employment growth will lead to a gradual reduction in the unemployment rate.
In April, the Governor referred to tightening financial conditions due to the rise in short-term USD interest rates and this observation has been repeated today.
Sentiment around household consumption “source of uncertainty”; housing markets “have slowed”; and the AUD (TWI) “remains within the range it has been in over the past two years”; is consistent with recent statements.
Assessments of the global environment are largely unchanged despite the increase in long-term US bond yields of around 25bps.
Conclusion
We will receive a much more detailed update on the Bank’s views in the Statement on Monetary Policy on Friday. Since the last Statement, housing markets have slowed further; financial conditions have tightened; employment growth has slowed; and equity markets have become more volatile.
All of these factors point to the Bank having even more scope to remain patient with respect to policy.
As we have consistently argued since mid- 2017, Westpac continues to expect that the cash rate will remain on hold in 2018 and 2019.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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No rate change in 2018 and 2019: Westpac's Bill Evans

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EXPERT OBSERVER
The Reserve Bank Board decided to leave the cash rate at 1.50%.
The cash rate has now been on hold since August 2016.
Of course, we were not expecting any change today, but are always interested in the Governor’s Statement.
There were two issues that we thought might change in this Statement, particularly if the Governor had decided to be more upbeat in his commentary.
The first one was whether he would continue to describe the outlook for household consumption as “a continuing source of uncertainty”. This description was used in the September Statement but was dropped from the Minutes of that meeting. However, the comment has been repeated in today’s Statement. Secondly, we remain perplexed as to why the Bank can be optimistic about a lift in wages growth when it is only forecasting that the unemployment rate will fall from the current 5.3% to 5.0% by mid-2020. It was possible that, particularly following the upbeat employment report for August, the Governor may choose to indicate a lower target for the unemployment rate than the 5.0% that has been used in recent Statements. This was not the case and the 5.0% forecast has been retained. Of course, it remains a possibility that this forecast will be lowered in November with the release of the next Statement on Monetary Policy.
In terms of the actual changes in the Statement, we find two areas of interest.
Firstly, the inflation forecast for 2018 has been qualified. In September, a specific 1 ¾ per cent was nominated, whereas in today’s Statement, it is described as “one-off declines in some administered prices in the September quarter are expected to result in inflation in 2018 being a little lower than otherwise”. That probably refers to the recent lift in petrol prices which will affect the December quarter, adding upside risk to the forecast for headline inflation. No doubt, higher oil prices have been considered given the commentary around global inflation.
The second area where we have seen change has been around interest rates and credit. In September, following the out-of-cycle rate rise by one major bank, the Statement noted that the average mortgage rate paid is lower than a year ago. That strong comment is no longer used and it is merely pointed out that while lenders have increased their standard variable mortgage rates by small amounts, they have been reducing mortgage rates for some new loans.
Commentary around credit growth has changed. Whereas in September, housing credit growth was noted as declining, in this Statement, the Governor prefers to point out that “growth in credit extended to owner-occupiers remains robust”. Whilst at an annual rate of 7.4%, this is certainly true, the profile is slowing when we consider that the value of new lending to owner-occupiers (ex re-financing) is now down 5% for the year. Certainly, the new lending statistics support the second point “demand by investors has slowed noticeably”, with our estimate of the value of new lending to investors being a 27% fall (ex re-financing) for the year.
Secondly, in September, the Governor referred to “lending standards are also tighter than they were a few years ago”. This has been replaced with “credit conditions are tighter than they have been for some time”. Arguably, that is a stronger assessment of current credit conditions.
Conclusion
The final paragraph in the Governor’s Statement is identical to the Statement in September, emphasising that progress in reducing unemployment and returning inflation to the target is likely to be gradual.
While markets appear to be pricing in around a 40% probability of a rate hike by end 2019, we remain comfortable with our forecast that rates will remain on hold through 2019 and 2020.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. 
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No surprises in RBA Governor statement: Westpac's Bill Evans

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EXPERT OBSERVER 
This month’s small gain follows a 5.2% fall through August and September. During that period the boost from the tax cuts announced in the May budget had faded while the leadership change; mortgage rate increases; declining house prices and rising petrol prices were weighing on confidence.
It is encouraging that these negatives seem to have, at least for the time being, run their course. Several positives have likely helped stabilise the Index, including strong economic growth, a solid labour market and ongoing recoveries in the previously weak mining states.
The net effect has seen the headline index holding slightly above the 100 line indicating that optimists are just outnumbering pessimists. The slight ascendency of optimists has been the case for 11 consecutive months since December 2017. That contrasts with the previous 12 months between December 2016 and November 2017 when the Index registered below 100 for 11 of those 12 months.
Concerns around interest rates and house prices are still apparent. The sub-group detail showed sentiment amongst households with a mortgage continued to weaken in October, dipping a further 0.8% to be down 6.4% over the last two months. Interestingly, the breakdown by voter group suggests some of the negative sentiment impact from the change in Prime Minister in late August may have reversed with confidence amongst those identifying as Coalition voters recovering about two thirds of the 6.4% drop recorded in September.
Most index components recorded small gains in October. Assessments of family finances showed the most promising revival. The ‘finances vs a year ago’ sub-index rose 2.6% to be comfortably above levels this time last year, albeit still a couple of percentage points below the highs seen earlier this year. The forward view is less convincing. The ‘finances, next 12 months’ sub-index only edged up 0.6% and is 4.1% below its high following the announcement of the tax cuts in the Budget in May.
Consumer expectations for the economy also showed mixed moves. The ‘economic outlook, next 12 months’ sub-index posted a solid 2.3% rally but longer term expectations continued to soften. The ‘economic outlook, next 5years’ sub-index is now down 9.1% from the five year high recorded back in July.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/10/consumer%20sentiment%201.jpg" alt="">
Spending-related sentiment showed little change on the relatively downbeat tone in recent months. The ‘time to buy a major household item’ sub-index inched 0.1% higher but is still around the lowest levels seen since November last year.
Labour market expectations, which were a notable bright spot in the weak September survey, softened a touch in October. The Westpac Melbourne Institute Unemployment Expectations Index lifted 1.7% (recall that higher reads mean more consumers expect unemployment to rise in the year ahead). Despite this, the index still shows a clear improvement from the softer reads through June-July-August with a solid 5% improvement on a year ago. Most of this is coming from a more balanced performance across the major states, with a particularly dramatic turnaround in labour market expectations in Western Australia.
<a href="https://www.propertyobserver.com.au/images/2018/10/10/consumer%20sentiment%202.jpg" target="_blank">Click here</a> to enlarge:
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/10/10/consumer%20sentiment%202.jpg" alt="">
Consumer views around housing continue to deteriorate. The ‘time to buy a dwelling’ index slipped a further 0.9% following September’s 4.8% fall, unwinding all of the 5.5% gain in August. Despite the weakening, buyer sentiment is still well above the lows seen through mid-2017.
Consumer expectations for house prices posted another sharp fall in October. The Westpac Melbourne Institute Index of House Price Expectations dropped 7.4% to 101.4, taking the index below its 2015 low point to the weakest level since the first month the survey question was run, in May 2009. The state detail showed a particularly sharp 20.3% drop in Victoria, suggesting the price correction in Melbourne, which has been slower to come through than in Sydney, is starting to bite.
Bill Evans is the Chief Economist for Westpac
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Consumer sentiment stabilises: Bill Evans

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EXPERT OBSERVER
The Governor of the Reserve Bank has announced a number of important initiatives to support the Australian economy and the financial system. Most of these initiatives come as no surprise. Westpac released a note on March 16 which set out its expectation for these initiatives.
<ol>
<li>The cash rate target has been reduced from 0.5% to 0.25%. Furthermore, it will not be increased until the Board believes that progress has been made towards full employment and inflation is sustainably within the 2–3% target band. Since exchange settlement balances are remunerated at the cash rate minus 0.25%, the Reserve Bank has committed to increase the remuneration to 0.10% in recognition that exchange settlement balances are likely to increase significantly as a result of this policy package. 
</li>
<li>The RBA has now adopted Quantitative Easing. However, instead of nominating a volume of bond purchases, it has nominated a target yield for the three year Australian government bond rate of “around 0.25%”. This is a bold move given that, in admittedly light trading, the yield on these bonds had been around 0.6% up until the announcement. Since the announcement, the rate has fallen to around 0.4%, and further adjustments to market rates may occur. Of considerable interest has been the reaction of the bond market in longer term securities, where the rate has increased to a volatile 1.6%, indicating a very steep yield curve. This yield objective is expected to be achieved through purchases of government bonds and semi government bonds, with the purchases to occur across the yield curve. These will commence tomorrow. 
</li>
<li>Westpac is particularly pleased to see that the RBA is offering a term funding facility for the banking system. This facility will be provided for three years to authorised deposit taking institutions (ADI’s) at a fixed rate of 0.25%. ADIs will be able to obtain funding for up to 3% of existing outstanding credit. The objective is to support small and medium sized business. ADIs will still be required to take on the credit risk associated with these facilities, but may consider switching more expensive facilities for existing borrowers into these facilities, providing a cash flow boost to small and medium sized businesses. 
</li>
<li>These initiatives will not affect the Bank’s ongoing provision of liquidity to Australian financial markets through repo operations which have recently been extended to six month maturities or longer.</li>
</ol>
In addition to these initiatives announced by the RBA, the Treasurer’s Office has announced that the Australian Office of Financial Management (AOFM) will be provided with an investment capacity of $15 billion to invest in wholesale funding markets used by small ADIs and non-ADI lenders. As signalled in Westpac’s note of March 16,  this initiative parallels a similar initiative by the AOFM  during the Global Financial Crisis. It will be of particular support to issuers of Mortgage Backed Securities.
Comment
The Bank is adopting a bold policy response to target the three year bond rate at well below current market pricing. This means that they are using their balance sheet to make a significant difference to the risk-free yield curve and therefore providing support to the financial system.
The market will no doubt take full advantage of this policy decision, and it will be interesting to see the volume of required purchases to achieve the interest rate target.
Westpac has been promoting the use of term funding facilities since around July last year, and we are particularly supportive of this initiative.
This article was <a href="https://westpaciq.westpac.com.au/Article/42641/14186/" target="_blank">first published on WestpacIQ</a>
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BILL EVANS is the <a href="https://www.westpac.com.au/news/authors/bill-evans/" target="_blank">chief economist at Westpac</a>.
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RBA and Commonwealth Treasury announce initiatives to support financial system: Bill Evans

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EXPERT OBSERVER
As expected, the Reserve Bank board kept its policy settings unchanged at the Board meeting in July.
The assessment in July confirms the theme in the June Board meeting (“it is possible that the depth of the downturn will be less than earlier expected”) with, “Conditions have stabilised recently and the downturn has been less severe than earlier expected”.
However, as with June, the outlook is described as “highly uncertain”.
On August 7, the Bank will release its revised forecasts out to December 2022 (extended from June 2022 in May).
We will be interested in how this more positive assessment channels into the forecasts.
From a policy perspective the most interest will be in the assessment of the medium term outlook.
We assess that the Bank expects it is extraordinarily unlikely to see the need to adjust policy settings in 2021.
But recall that in its “upside scenario” in the May Statement on Monetary Policy the Bank assessed an unemployment rate of 5% by June 2022. Such an improvement in the unemployment rate would probably see it considering a move in its three year bond target at that time since it confirmed today ”the yield target will remain in place until progress is being made towards the goals of full employment and inflation”.
The unemployment rate in the base case is forecast to be six and a half per cent by June 2022 – down from nine per cent in December 2020.
That nine per cent  is likely to be reduced (Westpac is currently at eight per cent) reflecting the “less severe” near term conditions but I would be surprised if the Bank has seen enough evidence around the growth risks to lower the base  unemployment forecast in June 2022, particularly given the Governor’s understandable caution around the virus both domestically and internationally.
Growth through to December 2020 is also likely to be revised up from minus six per cent to nearer Westpac’s forecast of around minus four per cent.
But that will be largely offset by a considerable reduction in the 2021 growth forecast of six per cent (Westpac’s forecast is three per cent).
Evidence that the Bank may adjust its 2021 forecasts downwards comes through the Governor’s observation that “As some businesses rehire workers as demand returns, others are restructuring their operations”.
Of considerable interest will be the Bank’s assessment of the level of activity in the economy by end 2021 relative to the end of 2019. Current forecasts are for activity to be only around 0.4 percentage points below that level.
Westpac is more cautious at around 1.2 percentage points but both estimates will have activity more than five percentage points below trend over those two years.
And, of course, bear in mind that those forecasts in May assumed an AUD at USD 0.64 over the forecast period. Readers will be aware that Westpac expects the AUD to lift to USD 0.72 by December 2020 and to USD0.76 by end 2021.
Markets have been expecting that the Governor might comment on the AUD’s current level which is above USD 0.695.
However, while I am sure that he would like a lower AUD there is not much point in criticising its level if he has no intention of addressing the issue through policy. Policies such as negative interest rates and/or unsterilized intervention have been variously described as extraordinarily unlikely.
The Statement today clearly signalled steady policy except with respect to targeting the three year bond rate “will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for three year AGS”.
That statement implies that the Bank has adequate commitment to add to the AUD 40 billion it has already purchased, although only around a quarter was purchased in the two – three year maturity range.
Those purchases were in a year when the Budget deficit lifted from “balance” to a deficit of (we forecast) AUD 95 billion. This year (2020/2021) we expect the deficit to balloon to AUD 240 billion, making for a more active RBA, specifically if domestic and global growth surprise to the upside or market stability falters.
The Deputy Governor Guy Debelle seemed more flexible by ending his speech to the Economic Society last week with, “the Reserve Bank will maintain the current policies to keep borrowing costs low and credit available, and stands ready to do more as the circumstances warrant”.
Candidates for those “circumstances” range from a rampant AUD to another global crisis.
Bill Evans is the chief economist at Westpac
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