Frydenberg Signals to Banks to Ease Lending
The Treasurer Josh Frydenberg has made a statement directed to lenders at a stockbroker conference in Sydney, regarding the tightened lending conditions experienced out of the Hayne Royal Commission. This comes as policymakers aim to stimulate the economy as the prospect of softer economic conditions loom.
Mr Frydenburg noted in the stockbroker conference, that the “banks now have an opportunity to continue to provide the capital flows into the economy: that is their economic and social responsibility”. This followed Frydenburg’s meeting on Wednesday with the Australian Prudential Regulatory Authority (APRA) regarding the lowering of the 7% serviceability buffer on home loans.
On Tuesday the Treasurer met with RBA governor Phillip Lowe which was also attended by the PM Scott Morrison, discussing future monetary policy positions and the government’s proposed tax and infrastructure plans. This follows Dr Lowe’s previous comments identifying the increasing limitations bestowed upon monetary policy and how an increase in government expenditure may be needed to support the economy.
Also this week, bank stocks have rallied in response to the federal election outcome and the loosening of APRA’s credit policy. Frydenberg mentioned that as a result, banks should now be more comfortable giving out credit “now (that) the royal commission and the election is over … we can get on with business”.
The tax relief plan, which was set out in the budget and taken to the election attempts to “drive productivity gains into economic growth and more jobs”. Generally, individuals earning up to $126,000 will get up to $1080 in tax relief, with small to medium sized businesses with a turnover of up to $50 million to get access to an instant asset write-off up to $30,000.
“The governor acknowledges how important our tax relief promised in the budget is to increasing disposable income for Australian households,” Frydenberg alluded to the aforementioned limitations in monetary policy – as the cash rate approaches historically low levels. The Treasurer also reaffirmed its $100 billion in infrastructure spending taken to the election including various road projects and the new airport in Western Sydney.
This aggressive growth strategy has involved the government lobbying with other policymakers and regulators in response to signs of a slowing economy. Key macroeconomic measures have alluded to the slowdown, with unemployment edging up to 5.2% in April, an inflation figure of 0% in the March quarter and overall 1.3% over the previous 12 months – below the Reserve Banks target rate of 2 to 3%.
In fact, the RBA has only edged into the target band once in the last two years (June 2018). This coupled with low wage growth and restrictions on credit, could form an argument on whether monetary policy does have an effect or would have enough of an affect if loosened – especially at these historically low levels. Also, the policy is a blunt tool and would have unintended repercussions such as reducing interest rate differentiables with overseas economies, in theory reducing the attractiveness to overseas investors, potentially dropping the dollar but also foreign investment.
The government is attempting to negate these issues by approaching domestic regulators such as APRA which potentially have more scope and precision to deal with the current economic conditions. Whilst interest rates are at historically low levels, conditions to meet the lending criteria has not moved to reflect this.
The continued criticism of APRA has been addressed by the removal of the 7% serviceability buffer, which is to be expected to be replaced by a buffer of 2~2.5% against the actual interest rate paid. This has been in turn praised by the government and the RBA making credit more affordable to households.
By Sydney Robertson
Click here for a one month free trial to our Lotus Blue Portal.