Despite expressing worries about the housing boom, the central bank head vows to keep the cash rate low
The head of the Reserve Bank of Australia has expressed concern that Aussies may not continue to borrow responsibly, but dismissed speculation that the central bank would raise interest rates sooner rather than later.
The residential property market’s resilience through the COVID-19 pandemic has surprised experts, and the market is still going strong, with recent CoreLogic data showing that home values spiked 2.1% in February – the largest month-over-month gain in more than 17 years.
That resilience has many market watchers predicting that the RBA will be forced to raise the cash rate sooner than expected, according to a report by The Australian.
ANZ chief executive Shayne Elliott recently said that the supply shortage and rising demand that is pushing home prices up is unlikely to end anytime soon – which could force the RBA to raise rates. Steve Mickenbecker, Canstar group executive of financial services, told that the central bank – which has said it doesn’t expect to raise the cash rate before 2024 – could find itself under pressure to move sooner.
But speaking at a business forum on Wednesday, RBA Governor Philip Lowe quashed predictions of an early cash-rate hike.
“That is not an expectation we share,” he said.
However, Lowe said he would be worried if Australians started “borrowing ridiculous amounts of money” in a speculative way.
“The issue is, prices are rising,” he said. “Are people borrowing responsibly and carefully?”
Lowe also warned that looser lending standards would increase the upward pressure on house prices and create financial risks.
“We are not at this point, but we are watching carefully,” he said.
Lowe said the cash rate would remain at its current record low of 0.1% until inflation was sustainably within the 2%-3% range, The Australian reported.
“It is not enough for inflation to be forecast to be in this range,” Lowe said. “Before we adjust the cash rate, we want to see actual inflation outcomes in the target range and be confident that they will stay there. This is an evolution from the approach earlier in the inflation-targeting regime, in which forecasts of inflation played a more central role in decision-making about interest rates. We continue to pay close attention to the forecasts, but we want to see actual inflation outcomes consistent with the target before moving the cash rate.”
Lowe also said the RBA was keeping an eye on the housing market, but there were many factors to consider, according to The Australian.
“There are many moving parts at present: record-low interest rates, a shift in preferences towards houses and away from apartments, strong demand for housing outside our largest cities, large government incentives for first-home buyers and builders, and the slowest population growth in a century,” Lowe said. “Time will tell as to how these various factors ultimately balance out, but history suggests that shifts in population growth can have large effects on the housing market.”
CommSec chief economist Craig James told The Australian that Lowe was stressing that the economy had a long road ahead before complete recovery.
“The governor sought to emphasise that he believes that rising bond yields are sending false signals on the inflation risk and the potential for a lift in the cash rate,” James said. “While ruling out the use of monetary policy to slow housing demand, Governor Lowe indicated that the focus was very much on lending standards.”