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In his address at a Reserve Bank (RBA) board dinner, governor Philip Lowe reflected on domestic market conditions, making note of the continued fall in property prices, the tightening of lending standards and out-of-cycle rate hikes from several lenders, including Westpac, in response to rising funding costs.
Mr Lowe’s remarks followed the RBA’s announcement of the September cash rate, which was held at 1.5 per cent, with the central bank maintaining a largely positive outlook of the Australian economy.
“The board is closely monitoring housing markets across the country and trends in housing finance,” Mr Lowe said.
“Housing credit growth has slowed, which, from a medium-term perspective, is a positive development.
“Our assessment is that this slowing largely reflects reduced demand for credit by investors, although there has been some tightening in the supply of credit as well.”
Mr Lowe added that he wasn’t concerned about the recent downward trend in the housing and credit markets, which he noted have been largely driven by a decline in investor demand.
“With housing prices falling in a number of cities, largely due to a shift in the underlying fundamentals, investors no longer find it as attractive to invest in residential property as they once did,” the governor added.
“This is a normal part of the cycle.”
The RBA governor also acknowledged that “credit standards have been tightened” but claimed that “mortgage credit remains readily available”.
Mr Lowe also made note of the out-of-cycle interest rate increases announced by several lenders over the past few months, including Westpac’s move to hike all of its home loan rates by 14 basis points.
However, the RBA governor sought to highlight that the average interest rate has fallen since August 2017.
“I would note that some banks have increased their mortgage rates recently in response to somewhat higher interest rates in short-term wholesale markets,” Mr Lowe said.
“A much less remarked upon fact is that the average mortgage rate paid in Australia has fallen since August last year, as lenders have increased their discounts.”
Moreover, Mr Lowe reiterated the central bank’s view that the next cash rate move would be up, citing “progress” in the labour market and rising inflation.
However, speaking to Mortgage Business last week, economist at Market Economics Stephen Koukoulas claimed that the central bank has “misread” the market, noting that it could be forced to revise its monetary policy outlook if conditions weaken further and banks continue lifting rates out of cycle.
“It’s still highly conceivable that the next move in rates is down, not up, and that would take an about-face from the RBA who have said the exact opposite,” the economist said.
Senior economist at AMP Capital Shane Oliver echoed Mr Koukoulas’ sentiment, stating that the RBA’s outlook has been “too optimistic”.
“The Reserve Bank is probably just a bit too optimistic about things, and it may be right [to say] that the next move in interest rates will be up, but that depends on their economic forecasts being proven to be correct,” Mr Oliver said.
“Whereas at the moment, my take on the indicators are that we’re stuck in the [economic growth] range we’ve been in over the last few years now, which is around 2.5 to 3 per cent. But it’s hard to see us growing sustainably above 3 per cent like the Reserve Bank is looking for.”
He continued: “At the same time, the housing market downturn adds a degree of risk to things, and for that reason, you can’t rule out the next move being a cut.
“I wouldn’t advocate a cut at this stage, because I don’t think things are that bad, but I certainly wouldn’t rule it out at some point down the track.”
[Related: RBA announces cash rate decision]
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