RBA “monitoring trends” in housing market despite cash rate decision

by Mike Wood07 Jul 2021

The Reserve Bank of Australia has called time on the era of low interest rates, setting the stage for an interest rate rise.

The initial statement that the cash rate would not rise from 0.1%, made yesterday afternoon, was as expected, but later in the day, Governor Philip Lowe gave a rare press conference to explain that the central bank would be taking other measures to stem the current spiralling housing market.

Lowe said that “will be monitoring trends in housing borrowing carefully” in order to inject an element of control into the exploding property market, especially with the rising spectre of household debt that goes hand in hand with increased property buying.

“What neither APRA or the Reserve Bank want to see is credit growing too quickly relative to people’s incomes,” said Lowe. “It’s not in the country’s long-term interests to have debt increasing at a much higher rate than people’s income.”

“If we saw a large and sustained gap in household credit growth relative to income growth then we would be looking at various policy responses.”

That said, the bank said that they would not shift on the cash rate ahead of schedule, and are instead employing other means to change market conditions.

“For the cash rate guidance to fundamentally shift from 2024 to 2023 we would need to see strong, unequivocal evidence that the pickup in the economy is translating into wages growth and inflation more quickly than we had expected,” said Lowe on a media conference call.

“There are these really fundamental factors that have kept wages growth low for a decade, so we would need to be convinced that those factors have gone away and been replaced by a new set of factors.”

The RBA has also announced programme of bond buying from the government that they hope will lift wages growth and inflation.

They are already the biggest single purchaser of bonds, and thus one of the major funders of the current government subsidies, and it is thought that 30% of all Australian Government bonds are being bought by the RBA.

"The RBA is performing a fine balancing act," said Jay Ahluwalia, mortgage specialist at YourMortgage Broker. "It needs to respond to an economy that is no longer looking like it is about to jump over North Head but is instead taking flight over the harbour, whilst being mindful that a lockdowns and extended border closures can mean that the wind can change unexpectedly."

"As expected by most, the rates have been left in their place, but the bank has tapered their bond purchase program from $5 billion a week to $4 billion. Whilst there is clear acceptance that the economy is doing much better than expected, there is also the reality of a global economy still working out how to operate in this disjointed, lockdown prone, restriction, travel bubbled semi vaccinated, remotely working world."

"This is where the CBA feels differently and is certain that rates will need to go up well before the timeline being suggested by the RBA. Where Governor Lowe is saying, “This improvement has widened the range of plausible scenarios for the cash rate.”, the largest lender in the country believes the rates will need to be increased sooner."

"Considering its size, asset holdings and influence in the market, many other banks are now also thinking that the other plausible scenarios are more plausible. Whilst RBA continues to have its focus on inflation and wage growth, it may need to end up raising its rate due to worryingly high property and other asset valuations."

"In the middle of all this is our property owner. As a broker, we are telling clients to make sure they also keep sight of their overall situation, long-term goals and what it is they are trying to achieve. The conversation today must be more than rates because there are too many plausible possibilities available."