For many – life in Australia is largely returning to normal. More than nine in every ten jobs lost during COVID-19 has returned, and business and consumer confidence has surged to a decade high.
While industries like aviation and tourism continue to be affected by international border closures, economists are predicting gross domestic product (GDP) will fully recover by mid-2021 as household spending, the vaccine rollout and an expected housing boom offset a collapse in immigration.
As the economy roars back to life, there has been growing speculation that the Reserve Bank may be forced to raise interest rates as early as next year.
RBA Governor Philip Lowe has used a recent speech to shut down those reports.
“Over the past couple of weeks market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023,” said Dr Lowe.
“This is not an expectation that we share.”
When will interest rates rise?
Dr Lowe reiterated the official cash rate will remain at a record low of 0.1% until inflation has sustainably returned to its target range of between 2 and 3%.
He said that’s unlikely to happen until unemployment is lower and wages growth is above 3%.
Currently, wages growth is running at just 1.4% – the lowest rate on record.
“Our judgment is that we are unlikely to see wages growth consistent with the inflation target before 2024,” said Dr Lowe.
“This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.”
Lending restrictions the next lever
While the RBA doesn’t target house prices, the Council of Financial Regulators – of which the RBA chairs, recently issued a statement saying they’re prepared to clamp down on lending if borrowers begin taking on debt they can’t afford.
It comes as property analysts predict double-digit price growth over the next two years as record low interest rates give buyers the confidence to borrow.
“I recognise that low interest rates are one of the factors contributing to higher housing prices and that high and rising housing prices raise concerns for many people,” said Dr Lowe.
“There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to maintain its strong focus on the recovery in the economy, jobs and wages.”
According to some economists, any steps to cool the housing market are likely to focus on macroprudential controls, such as tighter lending criteria for high debt-to-income loans.
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