Official interest rates could be hiked before 2024 due to the nation’s rapid economic bounce-back from the coronavirus pandemic as the Reserve Bank reveals it is already war gaming how to take heat out of the nation’s booming property market.
The RBA kept interest rates on hold at its July meeting but governor Philip Lowe said in a rare press conference on Tuesday afternoon that the economy has now shifted into an expansion phase and had recovered faster than expected from the coronavirus recession.
Ahead of the meeting the bank had said interest rates would not be lifted until 2024 “at the earliest” but Dr Lowe signalled the strength of the recovery meant this point may be brought forward.
“Our central scenario continues to be that the condition for an increase in the cash rate will not be met until 2024,” Dr Lowe said. “But there are alternative plausible scenarios as well … This means that probabilities have shifted”.
Major financial institutions including the Commonwealth and Westpac banks have tipped interest rates to move in late-2022 or 2023.
The RBA has started winding back its emergency level of support delivered to the economy through the pandemic recession as it becomes more confident about Australia’s recovery.
Following its July board meeting, the bank confirmed it would maintain the April 2024 government bond as its target for yield control rather than extend it to the November 2024 bond.
In a major shift to its quantitative easing program, it will purchase $4 billion worth of government debt until at least mid-November. The current $100 billion round of purchases is due to end in September.
The governor said the economy was in a better condition than had been forecast.
“The economic recovery in Australia is stronger than earlier expected and is forecast to continue. The outlook for investment has improved and household and business balance sheets are generally in good shape,” he said.
Dr Lowe said one unknown fact continued to be the closure of the nation’s borders. While the limit on new arrivals was putting upward pressure on wages it was holding back businesses who needed skilled labour for their investment plans.
A growing concern is the lift in house prices across the nation’s capital cities. The median house value in Sydney alone has climbed by more than 18 per cent so far this year, while household debt is growing faster than incomes.
The governor said the bank was focusing more on the events playing out at the nation’s Saturday housing auctions.
“Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers,” he said.
“There has also been increased borrowing by investors. Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”
He revealed the bank is actively considering options to take the heat out of the housing market, including new interest rate buffers where borrowers are assessed against higher repayment levels, as well as limits on loan to value ratios and debt to income.
Even before the bank’s decision, many lenders were starting to increase some of their mortgage interest rates.
Figures compiled by RateCity.com.au show that during the past month, 19 lenders have increased at least one three-year fixed rate while 17 have increased at least one two-year fixed rate.
Job site Indeed Asia-Pacific chief economist Callam Pickering said the national economy strengthened over June, exceeding policymakers’ expectations.
“However, the RBA remains dovish, not expecting rates to rise before 2024,” Mr Pickering said. “That said, the recent data flow suggests tighter policy next year is certainly possible.”
EY chief economist Jo Masters said the change in Dr Lowe’s language away from “2024 at the earliest” for a cash rate rise was notable.
“If the economic recovery continues to surprise on the upside, the RBA will need to act on the cash rate earlier than the current guidance,” she said.
Article Source: www.brisbanetimes.com.au