Australia’s central bank has hit back against expectations it isn’t being realistic on interest rates, as it reveals its thinking on the state of the economic recovery and the housing market.
Giving an address to the Anika Foundation on Tuesday, Reserve Bank of Australia (RBA) Governor Philip Lowe said that the market was wrong to expect any rate hikes before 2024.
“I find it difficult to understand why rate rises are being priced in next year or early 2023,” Lowe said.
“Our judgement is that it will take some time for wage increases to lift to a rate that is consistent with achieving the inflation target. There is a lot of inertia… and the experience of the past decade is unlikely to be reversed quickly.”
Nor would a rate hike be used as a mechanism to arrest runaway house prices, Lowe add, with Lowe arguing premature hikes would “mean fewer jobs and lower wage growth”.
“Some analysts have suggested we might lift the cash rate to cool the property market. I want to be clear that this is not on our agenda,” he said.
Lowe’s endless positivity – and refusal to cut off the supply of cheap money early – may have helped the market, rising from its midday slump.
Housing affordability a matter for Canberra
Lowe also repeated warnings that the Council of Financial Regulators – which includes the RBA, ASIC, APRA and Treasury – were mulling a credit crackdown should “lending standards deteriorate or credit growth accelerate too much”.
But the Governor also emphasised that such a move was about managing financial risk, not addressing affordability.
“While monetary policy is contributing to higher housing prices at the moment, the way to address the society wide concerns about affordability is through the structural factors that influence the value of the land upon which our dwellings are built.”
“These factors include the design of our taxation and social security systems, the planning system, zoning restrictions, the type of dwellings that we build, and the nature of our transportation networks.”
Those measures are all, as Lowe points out, outside the remit of Martin Place and a matter for federal and state governments. The inference being that the failure to address them is also the repeated failure of policymakers to address them.
Yet he also expressed concerns about longer-term trends in the lending market.
“It’s okay for a while for credit to be growing much faster than income but given the very high level of debt we already have, my view is that it’s not going to serve our collective interest to have debt rising at 10 or 11 or 12% a year when incomes are growing at half that,” Lowe said.
“It’s not a situation I hope that we find ourselves in but we can’t rule that out.”
Recovery delayed but on its way
The silver lining to rising asset prices however is that it will likely help drive the economic recovery.
Housing prices are up 19% on their pre-pandemic levels and Australian equities are up 10%, creating a positive wealth effect.
“This lift in the net worth of the household sector is one of the things that suggests that once the restrictions are eased, households will be well placed to start spending again,” Lowe said.
The RBA is banking on it, given it expects a 2% – or “possibly significantly larger” – contraction in the September quarter owing to lockdowns.
Likewise, with far heavier caseloads present in Australia this time around, compared to last year’s outbreaks, Lowe expects the “bounce back” to be much slower.
The new strain would mean the pre-Delta pace of recovery wouldn’t be hit until the second half of 2022, according to Lowe.
This would partially be due to the far more complicated outlook for many Australian businesses.
“Many are in a ‘wait, survive and see’ mode, having experienced a large drop in their revenue,” Lowe said.
“Government assistance is clearly helping but the longer these businesses have to wait before reopening, the more difficult things will become and the greater the potential damage to this important part of the economy.”
“The sooner we can open up safely, the better.”