philip lowe rba
RBA Governor, Philip Lowe. Source: RBA website.
  • The cash rate remains at 0.1%
  • Raising rates not expected until 2024 at the earliest
  • Low rates continue to drive the housing boom in Australia

As expected by almost all commentators and media outlets, the Reserve Bank of Australia (RBA) has decided to keep the cash rate at its historically low level of 0.1%.

Due to such easy monetary policy, housing prices have continued to soar across the nation. But now there is a concern of housing affordability constraints with a runaway property market.

While rising house prices are great for investors and those who currently own a home, they are not so great for first home buyers wanting to get their foot in the door of the market.

However, as reported on The Property Tribune, raising interest rates is a very unlikely way to tame surging house prices.

In a statement today, Governor Philip Lowe said that although the global economy continues to recover from the pandemic, inflation remains low and below central bank targets.

He continued, saying, “housing markets have strengthened further, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, especially first-home buyers.

Given the environment of rising housing prices and low-interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

Dr Lowe, RBA Governor

As reported previously, both the Australian Prudential Regulation Authority (APRA) and the RBA are watching lending standards very closely.

Although it has been argued these interventions are “not necessary right now”, tightening lending standards to ensure things do not deteriorate may be a likely path.

These are called ‘macroprudential policies’, which are essentially tools used to restrict bank lending.

For example, if lending is tightened, this might mean a borrower may only be allowed to borrow triple their current income for a deposit as opposed to six times. Another example could be that they must put down 20% on a house deposit instead of 10%. This limits the pool of people capable of participating in the housing market, cooling it down.

Credit intervention would only be warranted if there was a material rise in metrics such as debt-to-income ratios, loan-to-income ratios, or high loan-to-value ratio (LVR) lending.

We will see in the coming months whether any regulatory action will be warranted.

Dr Lowe also said that the bank will consider future bond purchases (quantitative easing) following the second $100 billion purchases under the government bond purchase program in September 2020.

He concluded, unsurprisingly, that the RBA remains committed to supporting the nation’s economic recovery to ensure full employment is reached and inflation is consistent with the 2-3% target. This would mean a tight labour market and an increase in wages.

Most economists believe the central bank will retain its policy-setting through to 2024. However, AMP’s Chief Economist, Shane Oliver said that although the RBA is still a long way from reaching its goals, he thinks a rate hike will actually come before the RBA’s expectation of “2024 at the earliest”.

Meanwhile, Professor Tony Makin from Griffith University has expressed concerns for the future economic recovery.

“Australia’s interest rate spectrum is ultimately influenced by global factors, most notably US interest rates. Ten year US Treasury rates have risen around 70 basis points since the beginning of the year and will keep rising due to the huge US budget deficit and higher expected inflation. The RBA will be unable to stem this tide.”

Professor Tony Makin, Griffith University

Dr John Hewson from Australian National University – who also served as leader of the Liberal Party from 1990 to 1994 – has also expressed similar concerns, writing simply “We do not have a sustainable recovery”.

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