The Reserve Bank has announced it will keep a close eye on the property market, after tipping a period of stability in record-low interest rates.
“Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation,” the Bank said in its minutes of the September board meeting released yesterday.
“On the other hand, the exchange rate remained above most estimates of its fundamental value, particularly given the declines in key commodity prices and, overall, had offered less assistance to date than would normally be expected in achieving balanced growth in the economy.”
UBS global chief economist Larry Hatheway told Fairfax Media that as Australia shifts from its dependence on the mining sector, a lower exchange rate is vital to rebalance the economy towards consumption and to stimulate exports.
"Getting from here to there though will be difficult. The Reserve Bank could facilitate that but cutting interest rates might exacerbate some of the bubbly-like conditions in the Australian housing market," he said.
The Reserve Bank is unlikely to cut interest rates further, as it is concerned that this would cause a build-up of risk that could later hurt the economy.
“Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later,” the Reserve Bank said.
“The main risks in such a scenario would likely be to the stability of the macroeconomy rather than the financial system, particularly if households were to react to declines in their wealth by cutting back on their spending.”
The Central Bank concluded that the most “prudent” course was to see interest rates remain on hold, although they will remain cautious.
“Accommodative monetary policy was supporting demand in some sectors of the economy, but policy also needed to be cognisant of the risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage,” the Bank said.