The Reserve Bank of Australia’s decision to slice another 0.25 of a percentage point off the official cash rate was largely to make up for the Australian dollar’s failure to depreciate in line with the economic fundamentals.
And there might be more to come. The statement by the governor, Glenn Stevens, noted that the RBA was using only some of the scope to ease monetary policy. That will be interpreted by the financial markets as a reaffirmation of the bank’s easing bias.
Our Bank usually takes it 25bp at a time, so this is as good as we were going to get. I would prefer the Bank to exhaust the scope for bringing rates closer to other developed countries before opting for Swiss-type intervention or, as some are arguing, before the Government considers a capital flows tax to bring the currency down.If risks emerge in the housing market as interest rates fall, the logical response is to move towards the normalization of risk weighting of lending for housing for capital adequacy purposes. We are not at that point yet.Some may worry that constraining bank lending for housing would encourage excessive activity in non-bank lenders via the RMBS market. I doubt that non-bank lending to housing would explode in these circumstances. If there were real prospects of it doing so, explicit prudential action would be the appropriate response, just as it would be for increased risks in bank lending.
Professor Garnaut, who advised then prime minister Bob Hawke on economic matters, told The Australian Financial Review Australia’s real exchange rate was “overvalued to an extent that has never been known before in a developed country”.
“It has to come down a long way [and] bringing interest rates closer to those in developed countries is a preferred way of bringing it down,” he said.
But Professor Garnaut warned that as official interest rates fell, the point might be reached where “housing prices enter risky territory”.
Rising house prices should be offset by forcing banks to hold more capital against their outstanding home loans, one option among a range of what have become known as macro-prudential policy tools, he said. New Zealand has adopted similar measures as it drives down official interest rates to ease its currency and house prices have risen.
