Reserve Bank steps up its language on housing market risk

ABC News – 19 May, 2015

By Simon Frazer

http://www.abc.net.au/news/2015-05-19/reserve-bank-steps-up-its-language-on-housing-market-risk/6480986?section=business

The Reserve Bank has stepped up its language on the risks posed by rising property prices, but still insists there is scope for another interest rate cut.

This morning the RBA released the minutes from its board meeting earlier this month, where the official interest rate was cut to a historic low of 2 per cent.

It was no surprise that the minutes confirmed that the central bank believes it still has room to cut rates further if required, given the speech by deputy governor Philip Lowe yesterday.

But the word “risk” appeared more prominently than in previous months in relation to the property market, particularly rising prices in the biggest markets of Sydney and Melbourne.

“Members … discussed the potential risk that low levels of interest rates could foster imbalances in the housing market,” the minutes said.

As at previous meetings, it appears the RBA is content to continued working with regulators to contain the risk, rather than tailoring its rates strategy to property prices.

The minutes also confirm that the RBA seriously considered holding fire on this month’s rate cut until June, but decided it was best for the cut to coincide with this month’s Statement on Monetary Policy.

“The latter course would bring the advantage of additional information on the economy, including details of the … Commonwealth budget,” the minutes said.

“On the other hand … members acknowledged that the challenges of communication might be more effectively met with a reduction in the cash rate at this meeting.”

Despite the RBA’s insistence there is still “scope” for further rate cuts, most analysts are not tipping one unless the economy deteriorates significantly further.

“We expect the RBA to stay on hold though, as today’s communications make clear, if the real economy underperforms, housing market exuberance will not (at this stage) hold back the board from cutting again,” said JP Morgan senior economic Ben Jarman in a note.

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