Marking its first monetary policy meeting of the year, the Reserve Bank of Australia (RBA) has today elected to leave the official cash rate on hold at 0.10%. It follows December’s decision to leave the rate on hold after November’s Melbourne Cup day record-breaking cut.
The announcement falls in line with previous rhetoric that the cash rate is unlikely to move for three years.
“Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time,” said RBA Governor Dr Philip Lowe in a statement following December’s meeting.
“For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. For this to occur, wages growth will have to be materially higher than it is currently.
“This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years.”
Employment data for December saw the unemployment rate decrease to 6.6%, according to the Australian Bureau of Statistics (ABS). Signifying marginal improvement, the number of employed people in December was 88,000 lower than March but 784,000 higher than May.
“Although employment has recovered 90% of the fall from March to May, the recovery in part-time employment has outpaced full-time employment,” said the ABS in a statement.
“While part-time employment was higher than March, full-time employment was 1.3% below March. The recovery in hours worked has been slower than the recovery in employment.”
House prices could increase by 30% over the next three years
House prices could increase by 30% over the next three years, according to an internal RBA document obtained by The Age and The Sydney Morning Herald via the Freedom of Information Act.
The RBA analysis showed house prices could jump by as much as 30% over the next three years due to the low interest rate environment and its impact on asset prices.
The analysis cited previous research by RBA economists to support its findings, which discussed the possible impacts of a permanent percentage point reduction in official interest rates.
It also noted low rates would likely increase the price of assets, which it believes could push up household wealth and spending.
“Housing prices are likely to (increase) alongside other asset prices,” the analysis found.
Tighter lending rules needed for new borrowers?
As well as discussing the impact on housing prices, the RBA analysis also noted the risks of a low interest rate environment.
This included the fallout of borrowers taking on too much credit if accompanied by “looser lending standards” and an “optimistic assessment of risk”.
“More of the loan book will be borrowers who bought near the price peak as new property purchases tend to increase during booms. Means more of the loan book is likely to be in negative equity,” read the RBA analysis.
The RBA stated that the Council of Financial Regulators (CFR), composed of the RBA, the Australian Prudential Regulation Authority (APRA), the federal Treasury and the Australian Securities and Investments Commission (ASIC) would monitor the situation.
“Australia’s financial regulators will monitor and control risks,” the RBA document stated.
“CFR will act if needed.”