Lessening stimulus would mean fewer jobs: RBA

Despite sharply rising house prices and credit growth, the Reserve Bank has continued to argue against lessening policy stimulus.

\Australian Reserve Bank Governor Philip Lowe. Picture: James Brickwood.

The Australian economy was expected to bounce back as vaccination rates rose and coronavirus restrictions were eased, but while house prices and credit growth continued to rise strongly, the Reserve Bank has continued to argue against lessening policy stimulus now.

After a tightening of lending standards by the Australian Prudential and Regulation Authority this month, the minutes of the RBA’s October board meeting noted that housing prices and credit growth had continued to rise strongly at a time of historically low interest rates.

“Given the environment of rising housing prices and low interest rates, members continued to emphasise the importance of maintaining lending standards and agreed that loan serviceability buffers were appropriate,” the RBA said.

“Members also agreed that, while less accommodative monetary policy would, all else equal, see lower housing prices and credit growth, it would result in fewer jobs and lower wages growth, which would in turn create further distance from the goals of monetary policy – namely, full employment and inflation sustainably within the target range.”

After APRA increased the minimum interest rate buffer rate for home loans this month, the RBA said other options to improve borrowers’ buffers would be portfolio restrictions on individual lenders’ shares of lending at high debt-to-income ratios and/or high loan-to-valuation ratios.

The RBA noted that APRA was scheduled to publish a macroprudential policy framework paper later in the year, which would outline the objectives for macroprudential policy, as well as the broad range of tools available to address different risks and how they could be implemented.

While the economic recovery was likely to be slower than late 2020 and early 2021, the economy was expected to return to growth in the December quarter and to its pre-Delta path in the second half of 2022, albeit much depended on health outcomes and easing of restrictions, the minutes of the RBA’s October board meeting said.

The lifting of restrictions in NSW and Victoria was expected to lead to a solid recovery in household consumption in the December 2021 and March 2022 quarters.

“This would be supported by high accumulated savings, strong increases in household wealth and a rebound in employment,” the RBA said. “Even so, households’ consumption of discretionary services was not expected to return to pre-pandemic levels until 2022.”

The central bank remained committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target.

It won’t increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024.

“Meeting this condition will require the labour market to be tight enough to generate materially higher wages growth than at the time of the meeting,” RBA minutes said.