RBA governor won’t raise rates to cool house prices

Australia’s national cash rate will be staying on hold until at least 2024, with the governor of the Reserve Bank of Australia (RBA) recommending that other avenues be considered to address rising house prices.

Speaking at a charity event for the Anika Foundation, RBA governor, Dr Philip Lowe, went through the effect of the Delta outbreak on Australia’s economy and monetary policy. While Dr Lowe acknowledged that Australia’s economy is currently experiencing a shock, and that Delta will likely delay the nation’s economic recovery, the shock should be only temporary.

With this in mind, the RBA intends to keep the record low cash rate on hold for the time being, alongside its other monetary policy measures. According to Dr Lowe, the RBA board won’t seriously consider increasing the cash rate until ‘actual inflation is sustainably within the 2-3 percent target range.’

“It won't be enough for inflation to just sneak across the 2 per cent line for a quarter or two. We want to see inflation around the middle of the target range and have reasonable confidence that inflation will not fall below the 2–3 per cent band again. Our judgement is that this condition for a lift in the cash rate will not be met before 2024.” 

Dr Lowe added that he expects it will take some time for wage growth to lift enough to achieve the inflation target, and also that he finds it ‘difficult to understand’ why markets are pricing in rate rises in 2022 and 2023.

Regarding house prices, Dr Lowe said that raising the cash rate to cool the property market was ‘not on our agenda.’ While higher interest rates could lead to lower property prices, they would also mean fewer jobs and lower wage growth, which DR Lowe said he considered ‘a poor trade-off in the current circumstances’.

Dr Lowe added that in order to help keep household borrowing sustainable, the RBA and the Council of Financial Regulators are ‘discussing possible regulatory steps if lending standards deteriorate or credit growth accelerates too much.’

However, Dr Lowe proposed that rather than looking at the cash rate or curbs on lending, it may be more effective to address issues with other factors affecting house prices, including:

• The design of Australia’s taxation and social security systems;
• Planning and zoning restrictions;
• The type of dwellings that are built, and;
• The nature of Australia’s transportation networks.

Despite the cash rate remaining on hold, Australian banks and mortgage lenders have been slashing home loan interest rates out of cycle from the RBA. While most of the competition was in fixed rates earlier this year, lenders have recently begun competing for the business of refinancers (The Australian Bureau of Statistics recorded a record $17.22 billion in refinancing activity in July 2021) by cutting variable interest rates.

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