The Reserve Bank of Australia says they are prepared to do more if necessary to support the economic recovery. Source: From Unsplash.
  • RBA commits to easy monetary policy
  • RBA clearly rejecting the orthodoxy of 'inflation hawks'
  • So long as RBA remains dovish, the property market will continue to boom

As reported on The Property Tribune, the Reserve Bank of Australia (RBA) has stood its ground in light of low inflation, keeping the cash rate at 10 basis points (0.10%).

RBA Governor Philip Lowe has expressed his continued commitment to quantitative easing, with a further $100 billion of bond purchases to be completed with the Bank “prepared to do more if that is necessary”.

With the inflation rate target of 2-3% predicted to not be met until 2024 at the earliest (it is expected that inflation will only be 1.25% over 2021 and 1.50% over 2022), the RBA looks to continue maintaining an exceptionally easy stance on monetary policy to support the economic recovery.

NAB’s latest Australian Markets Weekly report also supports the central bank’s predictions, saying that despite there being a strong start to the economic recovery, spare capacity will remain high until 2024  – when it is plausible the RBA will finally meet its inflation and employment goals.

However, inflation hawks may not be so thrilled with the RBA’s expansionary monetary policy.

An ‘inflation hawk’ (or conservative on central banking) refers to an economist, policymaker, or advisor that prioritises keeping inflation in check as the most important goal of monetary policy. They favour higher interest rates to reduce the risk of runaway inflation, being less concerned with employment and economic growth.

An example of a conservative central banker is Paul Volcker, who is widely credited with having ended the high levels of inflation in the U.S. during the 1980s using relatively levels high interest rates.

It is clear that the RBA has left the opinions of inflation hawks behind, as have many other central banks around the world.

Their central concern right now is employment.

This is reflected in their inflation target of 2-3%, allowing for fluctuations above or below the target for greater flexibility.

Inflation hawks tend to reject this policy, arguing for strict monetary and inflationary targeting believing that higher inflation is far more destructive than higher unemployment in the long-run.

Some argue that once economies fully reopen, massive government stimulus will combine with pent-up consumer demand, unleashing spending-fuelled price pressures unseen for decades.

However, economists on the other side of the aisle (such as US Federal Reserve Chair Jerome Powell) have downplayed the threat of higher inflation.

What this means for the property market

As long as the RBA keeps monetary policy ‘dovish’ (the opposite of hawkish), cheap money will continue fuelling the property market. Good news for investors and those looking to borrow money to buy real estate.

Meanwhile, major banks have forecast double-digit property price growth. Westpac has forecast 20% gains in the housing market over the next 2 years, and the Commonwealth Bank of Australia recently predicted up to 16% growth over the next 2 years (covered in this article).

Might the market run away and create a property price bubble?

It’s difficult to know for sure, but as reported before, Dr Lowe is not worried, arguing that there have been large rises and falls in the property market over the past few years and that the housing price index is still around the same level it was four years ago.

These comments mirror those of the President of REIWA, Damian Collins, who argued that even if the Perth property market rose 25% this year, for example, that would only put the market back to 2014 prices.

For now, the debate on monetary policy and a potential housing bubble continues…

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