4 things borrowers can do with an increase in equity
Thanks to the property boom pushing up property prices Australia-wide, many property owners aren’t necessarily awar...
The Reserve Bank of Australia has made its second call on the official cash rate for this year, following its decision to cut the rate to a record low in November.
In line with expectations, the RBA has held the cash rate at a record low of 0.1 of a percentage point.
“At its meeting today, the board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on the three-year Australian government bond, as well as the parameters of the term funding facility and the government bond purchase program,” governor Philip Lowe confirmed.
The RBA governor reiterated that rates will not be lifted until 2024 at the earliest.
“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.
“The board does not expect these conditions to be met until 2024 at the earliest,” Mr Lowe added.
However, with property prices booming at the fastest rate in 17 years, economists are expecting the bank to intervene earlier than planned.
Shane Oliver, chief economist at AMP Capital, believes a rate hike will occur in the March quarter 2023.
“The faster than expected economic recovery will likely see the RBA hike rates earlier than 2024, but probably not until 2023 because it fears that if it moves too early without waiting for a much stronger jobs market and 3.5 per cent or so wages growth, inflation will not be sustained in its 2-3 per cent target range.
“So, for now, it will push back against the back-up in bond yields by stepping up its various bond buying programs. And in the absence of earlier rate hikes, it will move to calm the property market later this year or through next year by working with APRA to once again tighten bank lending standards,” Mr Oliver said.
According to CLSA Premium’s Peter Boehm, the rate hike could materialise even sooner.
“The RBA has strongly indicated that interest rates will remain at their current levels for the foreseeable future, and there has been no economic data to suggest otherwise.
“We’ll need to see the impact of the end of JobKeeper in March, but if the economic recovery continues on its current recovery trajectory, it is highly likely we’ll see interest rates begin to rise early next year.”
In a document released by the RBA in January, following a Freedom of Information request, the bank predicted that a permanent 1 percentage point (100 basis point reduction) cut in the official rate could increase real housing prices by 30 per cent over three years.
Mr Lowe has since been questioned about the impact of low interest rates on property prices, but he has maintained that “the RBA does not, and should not, target housing prices”.
Questioned about the point at which the RBA will act to prevent the creation of “unsustainable prices”, Mr Lowe reiterated that the issue for the central bank would be if people didn’t borrow sensibly.
“We shouldn’t try and control asset prices.
“What we can have influence on is how much borrowing happens on the back of those rising prices,” Mr Lowe said.
“We would be concerned if there were to be a deterioration in these standards, but there are few signs of this at the moment,” he added.
CoreLogic’s national home value index revealed on Monday that Australian home values surged 2.1 per cent higher in February, the largest month-on-month change since August 2003.