RBA leaves interest rates, stimulus plans unchanged

Reserve Bank of Australia

The Reserve Bank of Australia noted the recent outbreaks of the coronavirus were interrupting Australia’s economic recovery, and GDP was expected to decline in the September quarter

The Reserve Bank of Australia (RBA) has left interest rates and its current stimulus plans unchanged, despite the extension of COVID-19 lockdown in Greater Sydney until at least the end of the month.

The cash rate target remains at 0.1 per cent and bond purchases will continue at $5 billion a week, until they are reduced to $4 billion a week in early September as was flagged at last month’s RBA board meeting.

In its board meeting on Tuesday, the RBA noted the recent outbreaks of the coronavirus were interrupting Australia’s economic recovery, and GDP was expected to decline in the September quarter.

But for now, it is sticking to its original plans to slowly taper its stimulus programme next month.

The experience to date has been that once virus outbreaks are contained, the economy bounces back quickly, RBA governor Philip Lowe noted in a post-meeting statement.

Dr Lowe said the outlook for the coming months was uncertain and depended on the evolution of the “health situation” and containment measures.

He said some increase in unemployment was expected in the near term due to the current lockdowns, but most of the adjustment in the labour market would probably take place through reduced hours worked and participation.

However, he said house prices had continued to strengthen, with increases in all major markets in Australia.

Housing credit growth had also picked up, with strong demand from owner-occupiers, including first-home buyers. But there was no mention of any moves to curb property price rises.

Dr Lowe is still taking a wait-and-see approach.

Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained, he said.

The RBA’s hands off approach to Australia’s housing boom is in stark contrast to the Reserve Bank of New Zealand’s (RBNZ) actions to cool an even bigger property boom across the Tasman.

In a statement on Tuesday, RBNZ governor Adrian Orr said house prices were above their sustainable level in New Zealand and he was concerned about the long-term wellbeing of everyone. He said the RBNZ also had to start thinking about how and when it would return interest rates to more normal levels, and how the economy would manage it.

House prices are above their sustainable level and the Reserve Bank of New Zealand — Te Pūtea Matua — is now considering tighter lending standards to reduce the risks associated with excessive mortgage borrowing, Mr Orr said.

It’s our role — as guardian or kaitiaki of the financial system — to limit these risks for the long-term wellbeing of everyone — borrowers, lenders, and the general economy, he said.

The RBNZ is preparing to consult with the country’s banks to tighten mortgage lending standards.

Specifically, it wants to target loan-to-value ratios (LVRs), and/or debt-to-income ratios (DTIs) and interest rate floors in mortgage serviceability tests.

Disclaimer: The opinions expressed by our writers are their own and do not represent the views of Getting Money Wise. The information provided on Getting Money Wise is intended for informational purposes only. Getting Money Wise is not liable for any financial losses incurred. Conduct your own research by contacting financial experts before making any investment decisions.

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