Shadow RBA says rates to rise

The AFR has today’s ruminations from the Shadow RBA Board:

Official interest rates are more likely to be higher in 12 months’ time, according to a group of prominent central banking academics and economists.

The group urged policymakers to keep the official cash rate on hold at 3 per cent when it meets on Tuesday.

…The nine-member shadow board – which includes former RBA policy­makers Warwick McKibbin and Bob Gregory – sees a 50 per cent probability that the cash rate will need to be higher in a year’s time.

“It seems more likely that slow recovery in the real economy will continue, with interest rates being shifted towards more neutral levels,” said Melbourne Business School associate professor Mark Crosby.

…University of NSW economics professor James Morley said the apparent improvement in the housing market supported a need to raise the cash rate in the medium term.

Jeffrey Sheen, head of economics at Macquarie University, said: “Asset markets are leading the recovery in Australia, suggesting that previous cash rate cuts are working.”

And there you have it again. Property killing industry, at least in the current context. It would be interesting to know Bob Gregory’s view given his recent medium term mega-bearishness.

I’d be prepared to bet that the Shadow board will be wrong.

Houses and Holes
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  1. This recent discussion about the relationship between property prices and interest rates has been facinating.

    As the savings rate declines (as it has over the last couple of months in particularl) Megabank will have to increasingly look overseas to fund new loans, this in turn will drive up the cost of borrowing, at that point what the RBA wants to do with rates will become completely irrelevant, it will be decided by market forces.

    The current conditions in the property market suggest to me that we will see a reinflating of the bubble because the RBA nor the government has the will intervene in any meaningful fashion. However as the savings rate plummets Megabank’s reliance on offshore funding will drive real interest rates up to the point where cheap credit will dry up. And we all know what happens when cheap credit dissappears as a bubble inflates.

  2. ‘I’d be prepared to bet that the Shadow board will be wrong.’

    But you are seeing (with obvious factual support) the RBA trying to stoke housing construction, and ignoring the property speculation effect en route to increased construction activity (assuming this comes).

    They are probably thinking that nobody would be so crazy as to start housing speculation as a means to keep aggregate demand in place and that rates will rise to prevent either increased real estate prices or increased private debt (starting from where we are).

    I am in full agreement with both of you in seeing a large turd on the side of the road ahead, with bright garish signs about every 100 metres leading up to it reading

    ‘Oz economy – Never Been a better time to buy!’

    And a man in a donut van plugging fries and tepid drinks (to support a mortgage or rent worth far more than he can support), desperately hoping some busload of tourists would stop to see the turd, will be the embodiment of Australias employment future.

  3. Have to agree with Tarric, the strategy is more about re-inflation of the bubble in order to keep construction humming along – residential construction has been terrible in the last 12 months as per discussions on this board in the last week. Keeping jumbo loans accessible and affordable is just part of the overall strategy; ensuring the tax system rewards speculators is another.

    The problem emerging for many small time landlords is that capital gain has been thin to non-existent in the last few years so there’s a loss of confidence in the system. Stamp duty and new mortgages have been in free-fall here in Victoria in the last twelve months – really bad news for our State Govt as they are reliant on housing to generate a bit part of their income. You’d never know it from living in my part of Melbourne though, new apartments on every corner and more being built all the time…

  4. The idea that RBA would be shocked or disappointed that property prices are responding to low interest rates is laughable.

    The shadow Board who love the debt transmission mechanism as much as the real RBA board and are merely noting that the debt engine is ticking over quite nicely at the moment.

    The whole point of low interest rates is to drive the growth in debt so that ‘borrowed’ money is spent out in Bunnings.

    Paying down household debt is the last thing the RBA want because they don’t see debt as problem – even while they dance around the debt mountain they have created so far.

    But more importantly paying down debt does nothing for economic activity now and that is all the RBA cares about.

  5. “I’d be prepared to bet that the Shadow board will be wrong.”

    then make a bet then

  6. hubris_and_hyperbole

    Why do these guys get oxygen? How is their punditry any different from the Joye/Bloxham type punditry over the last few years.