- Ian Harper, RBA Board member, says Australian house prices won’t dictate when the bank begins to lift interest rates.
- In the near-term, Harper says steady policy settings are the “best thing the bank can do for encouraging confidence and stability”.
- The RBA has kept interest rates steady since August 2016 despite weak inflation, sputtering economic growth and elevated unemployment.
When it comes to the outlook for official interest rate settings from the Reserve Bank of Australia (RBA), the housing market, or specifically prices, aren’t a consideration.
That’s the extraordinary view of Ian Harper, Dean of Melbourne Business School and RBA Board member, who told the Wall Street Journal today that the direction of house prices simply wouldn’t matter, at least in his opinion, if other circumstances aligned for a rate rise.
“The bank will raise interest rates when it has a basis for doing that — because inflation is starting to pick up,” he told the WSJ.
“When all that starts to line up, who cares what’s happening to house prices.”
Harper added that the RBA “doesn’t target house prices”, presumably referring to the bank’s three policy mandates of stability in the Australian dollar, the maintenance of full employment and the economic prosperity and welfare of the people of Australia.
While Harper’s views are his own, not those of the RBA or its Board, one has to question whether excluding house prices from policy deliberations is wise, especially at a time when financial stability considerations have risen in prominence under Philip Lowe’s tenure as RBA Governor.
Indeed, despite weak inflationary pressures, elevated unemployment and spluttering economic growth, the RBA has left interest rates unchanged since August 2016, likely reflecting increased concern that rate cuts would simply act to boost house prices and household debt levels, rather than inflation, as they did in late 2016 and most of 2017.
However, if housing has dictated policy when prices were rising — which it clearly has — why should it be any different if prices are falling?
The simple answer is it shouldn’t.
We’re talking about the largest store of wealth for most Australian households, valued at a collective $7 trillion, according to recent data from the ABS. And that doesn’t even include the direct and indirect exposure of households to Australian banking stocks.
An ill-timed rate hike could easily lead to further pressure on house prices, especially in Sydney and Melbourne, potentially amplifying the risk of adverse economic outcomes and financial instability.
However, despite those risks, Harper says it’s what’s happening in the boarder Australian economy that matters most, particularly the outlook for wage growth given the implications for inflationary pressures.
“From my perspective, as somebody who has an input into the setting of monetary policy, what matters is what is happening right across the economy,” he said.
On wage growth specifically, he said recent progress had been “steady” but “slow”, acknowledging that he was yet to see any convincing evidence of emerging wage pressures across the economy.
“It’s not something that I regard as obvious,” he said.
As such, he said that there was no need to adjust monetary policy settings in the near-term, echoing sentiments from by senior RBA officials in recent months, including Governor Philip Lowe.
“We’ve made clear that there isn’t a case for putting interest rates down, and there isn’t a case for putting interest rates up,” he told the WSJ.
“Steady as she goes. That is actually the best thing the bank can do for encouraging the confidence and stability that would then feed into higher wages.
“We are not jerking anything around, we have beady eyes on the forecasts. We are still sticking with this forecast. We are going to get there, but it is slow and steady.”
The RBA is currently forecasting a gradual decline in Australian unemployment will eventually lead to a pickup in wage pressures, something that — along with faster economic growth — would help to move underlying inflation back to within its 2-3% medium-term target.
While recent data suggests that wage and inflationary pressures are now slowly starting to increase, annual wage growth, at a shade over 2%, still remains well below the 3.5% level that RBA Governor Philip Lowe believes will be required to move underlying inflation back to the midpoint of its 2-3% target.
Right now, underlying inflation is running at an annual pace of just under 2%, according to data released by the ABS.
Adding to uncertainty over the outlook for an acceleration in wage pressures, Australian unemployment rose to 5.6% in April, moving further away from the 5% level where wage pressures are expected to increase.
You can read more at the Australian here.
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