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RBA Minutes show interest rate cuts likely despite house price bubble

RBA Minutes show interest rate cuts likely despite house price bubble
Mar 17, 2015

The Minutes of the Monetary Policy Meeting of the Reserve Bank in February show that further interest rate cuts are likely despite ongoing concerns about house price inflation especially in Sydey. Nevertheless, for the time being it was best to keep interest rates on hold. This decision was made after analysing both domestic and global data and finding that the full effect of the previous interest rate cut wasn’t fully felt yet. “In considering whether or not to reduce the cash rate further at this meeting, members saw benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier change,” the board members concluded.

Board members have found that although global data is either weak or negative across the global (with the exception of the US), domestic issues are of more concern. Recent reports from multiple analysts have shown that the Australian housing market is facing a potential pricing bubble as home prices have increased following the previous interest rate cut. In addition, Australia has the highest household debt in the world. The RBA also underlined concerns that if they did cut interest rates it could fuel the potential housing bubble further. “Risks in the household sector continued to be centred on housing and mortgage markets,” The RBA said. “The composition of these markets remained skewed to investor activity, especially in Sydney. Members noted that, at the margin, the recent decline in interest rates could boost the housing market, including prices.”

Ben Jarman, JP Morgan economist, also underlined concerns that an interest rate cut could fuel a housing bubble further. “There is a sense that the very speedy rebound in the housing market indicators in Sydney [and to a lesser extent Melbourne] since the February rate cut, and a lack of any meaningful progress on a macro-prudential measures to contain it, mean the RBA is working without a net here," he said. Although a cut to the cash rate could benefit some sectors of the economy, the RBA is hesitating until they can gather more information. Board members came to the conclusion that “further easing over the period ahead may be appropriate” but also found that “advantages in receiving more data to indicate whether or not the economy was on the previously forecast path” was necessary before making a final decision regarding the cash rate.

 

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