Australia Central Bank Holds as Housing Surge Comes to Fore

Australia’s central bank kept its key policy instruments unchanged Tuesday following the cooling of a global bond selloff and as the impact of record-low interest rates on asset markets comes into focus.

Reserve Bank of Australia Governor Philip Lowe and his board held the cash rate and three-year yield target at 0.10% and made no changes to the longer-dated bond-buying program. The central bank on Friday releases its semi-annual financial stability review that’s likely to hone in on lending and housing.

“Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully,” Lowe said in a statement. “It is important that lending standards are maintained.”

Australia Central Bank Holds as Housing Surge Comes to Fore

Australia’s house prices jumped in March by the most since 1988 as the economy’s recovery and cheap mortgages enticed buyers back into the market. The RBA has been able to return to its regular bond-buying regime as the global reflation trade that spiked yields tempered, a turnaround accompanied by a depreciation in the local currency that will please policy makers.

What Bloomberg Economics Says...

“The RBA’s focus on credit growth is too sanguine in our view. Surging loan approvals and the pickup in housing turnover means an acceleration in credit growth is set to emerge over coming months -- potentially catching the RBA and APRA behind the ball in terms of a policy response.”

-- James McIntyre, economist

Lowe is due in the months ahead to decide whether to keep the April 2024 bond as the bank’s YCC target, or roll over to the November 2024 maturity. He reiterated in today’s statement that the board will consider whether to do this later in the year.

The governor noted that the central bank’s first A$100 billion ($76.5 billion) of longer-dated bond purchases is almost complete and the second program of the same amount will begin next week.

“Beyond this, the bank is prepared to undertake further bond purchases if doing so would assist with progress towards the goals of full employment and inflation,” he said.

Australia’s recovery has been underpinned by early suppression of Covid-19. However, isolated flare ups have prompted local lockdowns and some states to shut borders, interrupting economic activity.

The most recent outbreak in in the northern city of Brisbane forced a three-day lockdown and coincided with the national government ending its wage-subsidy program JobKeeper, prompting fears the combination might have exacerbated job losses.

Australia has recovered the jobs lost during the pandemic, pushing down unemployment to 5.8% in February. Yet the hiring surge might pause in the period ahead, with Treasury estimating the removal of JobKeeper could result in the loss of up to 150,000 roles.

“The economy is operating with considerable spare capacity and unemployment is still too high,” Lowe said Tuesday. “It will take some time to reduce this spare capacity and for the labor market to be tight enough to generate wage increases that are consistent with achieving the inflation target.”

Meantime, the rise in property prices Down Under is generating attention, with Sydney surging 3.7% last month and climbing 6.7% over the first quarter. While housing prices are increasing from Singapore to Canada and the U.S., in Australia it threatens to swell an already worrisome pile of household debt.

©2021 Bloomberg L.P.

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