Phil Lowe: RBA won’t raise rates to cool housing

In the Q&A to yesterday’s speech to the Economic Society of Australia, RBA governor Phil Lowe hosed down speculation that interest rates would be lifted to cool the property market:

“I sometimes read commentary that we’ll raise interest rates to choke-off housing prices. And with housing prices rising quickly, the Reserve Bank will raise interest rates to choke that off. That’s a misunderstanding of our reaction function. We won’t be raising interest rates to choke off housing price increases.

“If borrowing is unsustainable, then we’d be talking with APRA about macro-prudential tools. But we’re not going to use monetary policy to deal with rising housing prices. It would be the wrong thing to do and I don’t think it would work…

“If I can disabuse anyone that that view that there’s any probability of it being in our reaction plan, thankyou for giving me the opportunity for doing that”.

So there you have it once again from the horses mouth: the RBA/APRA will use macroprudential restrictions to cool the housing market instead of lifting rates.

Rates will only be lifted once inflation moves above the RBA’s target range, which will likely require wage growth above 3%.

The above is in keeping with Lowe’s recent comments that the cash rate will likely remain on hold for several years.

Our guess is that macroprudential curbs will be implemented late this year in light of the recent strong increase in investor mortgage commitments.

Unconventional Economist

Comments

  1. “But we’re not going to use monetary policy to deal with rising housing prices. It would be the wrong thing to do and I don’t think it would work…”.
    It would absolutely work, you liar.

    • happy valleyMEMBER

      +1 Lowering the cash rate so quickly and low as he did, created the majority of the problem. Trying to rewrite history.

      • It’s ridiculous. I wish this unelected prick who controls the value of my assets and labour got just a fraction more of the scrutiny our politicians do for such a statement, along with the arbitrary requirements he’s added to justify increasing rates.

    • Hex TexasMEMBER

      +1, when you see statements like that from a very senior public servant, it is very hard not to come to the conclusion that our whole governance framework is corrupt.

  2. A potential Betoota headline: Phil Lowe drowns in shallow bath, refusing to pull the plug and opting instead to turn the cold tap on just a little bit.

  3. Hmmm, so by implication, is he saying that the massive rise in house prices this year was caused by relaxation of lending standards, and had nothing to do with lower interest rates being capitalised into house prices?

  4. Yeah, asset price inflation is not measured as inflation. RBA’s main job is to pump asset prices.

  5. Jumping jack flash

    “Rates will only be lifted once inflation moves above the RBA’s target range, which will likely require wage growth above 3%.”

    This!
    And you can be certain that they are looking for the wage inflation component before they move.
    To achieve that will require a great deal of CPI to account for losses and greed along the way. In my opinion to achieve 3% wages growth will take about 6% or more CPI.

    This is the whole point of the immense global stimulus effort in the name of COVID. Without any interest rates to cut to boost debt growth to the point where it needs to be, the plan is to inflate revenues with stimulus spending to flow into increased wages.

    This sets off a chain reaction with expanding debt at its centre to push everything along to infinity and beyond.

    We all know that debt is completely and utterly unnecessary in a properly functioning economy, but in the New Economy debt is absolutely, positively essential! Just try buying a house without using debt. Absolutely impossible! Its hard enough just to save up the 5% bare minimum deposit!

  6. Motron Driver

    I hope no one in this forum is really surprised or expected that politicians would fix the mess that they created in the first place. I stick to what I said in another post: we will head towards 20-25x price to income ratio over the next 3-5 years easily.
    Instead of a housing crash, over the coming years we will see negative interest rates, multi-generational loans and more tricks I cannot even think about.

    • As much as I hate to say it, it feels like that could be where we are headed.

      There’s an argument that we have become dependent on the demand side boost that comes from rising asset prices. So low rates are no longer enough, they need to be falling (asset prices rising) year on year.

      With the (near) zero lower bound on base rates, the obvious “next tricks” are along similar lines to the TFF and the “Credit Easing” seen elsewhere. Free money for banks to push mortgage rates towards zero. Add on government guarantee of mortgages to eliminate credit risk for banks. Extend the term of the funding and the matched fixed rate loans to the entire term of the mortgage (like in the US) so that banks no longer need to stress test for serviceability under a rate rise scenario.

      All of a sudden you have mortgages of 20x income.

      Of course, it’s just a question of politics. We could fill the demand shortfall with spending on public goods, or we could allow the labour market to tighten and real wages to grow for once, rather than relying on credit fuelled private consumption. But there’s no sign of either of those happening any time soon.