Interest rates too low for too long?

by Calida Smylie13 Jun 2014
Current stable lending figures indicate interest rates should stay at their current levels, according to a real estate lobby group – but a former central bank board member disagreed.

The Real Estate Institute of Australia said the latest housing finance figures released by the Australian Bureau of Statistics reflect a stable market.
The figures for April show, in trend terms, that the number of owner-occupied finance commitments increased by 0.1%, echoing similar increases over the first three months of this year.
If refinancing is excluded, in trend terms for April, the number of owner-occupied finance commitments fell by 0.1% – the same as in March and the second consecutive drop.
The value of investment housing commitments increased by 0.5% in April, following more than three years of consecutive monthly increases.
The proportion of first home buyers in the number of owner-occupied housing finance commitments fell to 12.3% compared to 12.6% in March – dramatically lower than the long-run average proportion of 19.9%.
The figures showed the Reserve Bank of Australia had made correct decisions in holding the official cash rate, REIA president Peter Bushby said.
“The April 2014 lending figures indicate a stable market, and signal a period in which interest rates should stay at their current levels,” he said.
However, former Reserve Bank of Australia board member Professor Warwick McKibbin has attacked the central bank for pushing official interest rates too low in a failed attempt to engage in the European, Japanese and US currency wars.
­McKibbin said “very loose” monetary policy was more likely to fuel housing and stock bubbles than real and ­sustainable economic growth, reported AFR.

The professor, now based at the Brookings Institution in Washington DC, said interest rates have been kept too low for too long in a misguided effort to lower the dollar and drive housing construction.

The International Monetary Fund said this week Australia has the developed world’s second-most expensive house market behind Belgium, and warned the central bank it could not ignore property bubbles.

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