Reserve Bank ‘closely’ watching house prices

The Reserve Bank has ‘acknowledged the risks’ of rising home values but sees few signs of deteriorating lending standards.

RBA Governor Philip Lowe addresses the National Press Club. Picture: Gary Ramage

The Reserve Bank is monitoring the effects of its easy monetary policy on the economy but says there are few signs of a deterioration in lending standards at this point.

Minutes from the RBA’s February board meeting reveal that members discussed the effects of low interest rates on financial and macroeconomic stability and “acknowledged the risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher leverage and asset prices, particularly in the housing market”.

However they concluded that there were “greater benefits for financial stability from a stronger economy, while acknowledging the importance of closely monitoring risks in asset markets”.

It comes amid predictions of a double-digit percentage rise in house prices this year as the central bank keeps its benchmark interest rates at record low of 0.1 per cent, while also injecting $5bn a week of liquidity into the economy via its recently-extended bond buying program.

CoreLogic’s Australian capital cities January house price index rose 0.7 per cent month-on-month.

But the minutes said the RBA board remained committed to doing what it reasonably could to support the Australian economy, and decided to maintain the existing policy settings.

“Members concluded that very significant monetary support would be required for some time, as it would be some years before the bank’s goals for inflation and unemployment were achieved,” the minutes said. “Given this, it would be premature to consider withdrawing monetary stimulus.”

At its February board meeting, the RBA decided to extend its recent quantitative easing program by buying an additional $100bn of government bonds with maturities of around five to 10 years at a rate of $5bn per week when the existing program is completed in mid-April.

The minutes are consistent with the view that the RBA will extend its quantitative easing program by another $100bn, perhaps in June, according to Capital Economics economist, Marcel Thieliant.

The minutes also show the RBA’s concern over the impact of international border closure.

The level of GDP was not expected to return to its previous trajectory over the forecast period, largely because population growth would be so much lower than assumed prior to the pandemic.

“Lower population growth would continue to weigh on both aggregate demand and labour supply in the period ahead, although the effects on labour supply and wages would be partly limited by foreign students tending to have a lower participation rate than the domestic working-age population,” the minutes said.

“In other words, the closure of the border constitutes a negative demand shock that adds to the disinflationary effect of the pandemic,” said Capital Economics’ Mr Thieliant.

The minutes also reiterated that the RBA’s quantitative easing program had helped to lower interest rates and had “contributed to a lower exchange rate than otherwise.”

Moreover, the decision to extend quantitative easing took account of the actions of other central banks as well as market expectations and the potential impact on the exchange rate.

“A number of central banks in other advanced economies had announced extensions of their bond purchase programs to at least the end of 2021, and there was a widespread expectation among market participants that the Bank’s program would be extended in some way,” the minutes said.

“Given this, if the bank were to cease bond purchases in April, it was likely that there would be unwelcome significant upward pressure on the exchange rate.”

The Australian dollar hit a five-week high of US78.03c after the minutes were released.

The currency rose 3 per cent from a five-week low of US75.64c after the February board meeting.