• Greg Morgan

Reserve Bank Remains Upbeat

As lockdowns continue across Australia and the property market reaches further into record territory, the Reserve Bank remains mostly upbeat. In his latest address, RBA Governor Philip Lowe said the cash rate is likely to remain at its current level well into the foreseeable future, with policy only likely to be changed when the inflation target is sustainably realised.

The cash rate has been at a record low since November last year, and it's unlikely to rise anytime soon. While the market has priced in a 0.8% jump in 2022, Mr Lowe is not sure why. "The current [overnight indexed swap] curve implies a cash rate of around 25 basis points by end of 2022, 60 basis points at the end of 2023 and close to 100 basis points at the end of 2024," he said, adding "These expectations are difficult to reconcile [] and I find it difficult to understand why rate rises are being priced in next year or early 2023."

According to Mr Lowe, the cash rate would only be lifted when wages are growing at an annual minimum pace of 3%, in an environment where inflation was comfortably within the 2-3% range. "Our judgement is that this condition for a lift in the cash rate will not be met before 2024." said Mr Lowe. While his assessment of the domestic economy was undeniably optimistic, Mr Lowe did make special mention of the growing housing affordability crisis.

The cash rate is currently sitting at a record-low 0.1%, which is helping to feed a rapid growth in house prices. According to data from Core Logic, national house values rose by 18.4% over 12 months to July, and unit values rose by roughly half this amount at 8.7%. While this is good news for many, it does come with significant risks. As prices rise and investors flock back to the market with the help of higher loan-to-value ratios, risk is growing and more Aussie households are exposed.

According to Mr Lowe, "While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built." A number of structural factors have influenced the property market, "including the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks."

While the low interest rate environment does come at a significant cost, it may help to achieve full employment and economic prosperity for most people in Australia. "Ever-rising housing prices relative to income, I don't think serves our collective good very well, it's something that as a citizen I would like to see addressed, but as a central bank we can't do anything about... While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth... This is a poor trade-off in the current circumstances."

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