The RBA should not lift interest rates solely to cool the Sydney and Melbourne property markets.
That’s the view of Paul Bloxham, chief Australia and New Zealand economist at HSBC, who says that lifting rates because of the housing boom in Sydney and Melbourne would be the wrong move.
“This argument is misguided,” he says.
“The central bank does not target housing prices or household debt. The RBA targets inflation.”
Given that mandate, Bloxham says that the labour market — in particular wage pressures — are of far more importance to the RBA, noting that, rather than housing, will determine when the bank begins to lift interest rates.
“The bottom line is that without a pick-up in local wages growth, which would then support domestic inflation, a cash rate hike would be a mistake and something we think the RBA is unlikely to deliver,” he says.
“Lifting rates simply because of the housing price and debt boom in Sydney and Melbourne would be the wrong move. Tighter prudential settings are the more likely policy tool that will be used to deal with this risk.”
Bloxham says that a rate hike to cool housing would be counter-productive to achieving the RBA’s inflation mandate, suggesting that a rate hike could potentially slow wage growth further making debt serviceability more difficult, making Australia’s financial system more unstable.
“It’s a balancing act,” he says. “The idea that the RBA would lift the cash rate to fight the housing prices boom runs counter to this logic.”
While he says that lifting rate for housing in two cities is a bad idea, and misguided, Bloxham says the next move in interest rates will still be higher, but driven by a lift in wage inflation.
“We do expect that the RBA’s next move on the cash rate will be up. We see the recent lift in commodity prices and national income as likely to flow through to some lift in wages growth and household incomes, which we expect to support a gradual lift in domestic inflation,” he says.
“We expect the RBA to be on hold in 2017 and to lift its cash rate in 2018.”