CoreLogic Property Pulse research analyst Cameron Kusher has a strong inkling that the Reserve Bank of Australia (RBA) would not be increasing its interest rate in the short term due to record high levels of household debt filed by the Australian public.
Kusher said RBA governor Philip Lowe suggested last week that if it weren’t for the strength of the housing market and a fear of inflating it further, official interest rates would be lower than its historic 1.5 percent.
“It was an interesting comment from an RBA Governor, especially when you read what the RBA’s function is: The (RBA) is Australia’s central bank and derives its duties and powers under the Reserve Bank Act 1959,” Kusher said in a statement.
“Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people,” he said.
Inflation is currently well below the RBAs target range, and the country is not at full employment which would indicate the central bank should be considering interest rate cuts.
“Clearly the economic prosperity and welfare of Australian people (linked to dwelling value growth) are a key reason why they are not cutting interest rates. When you look at some of the critical data, it seems like it could still be a long time before the RBA starts lifting interest rates again,” he said.
“The RBA has a target range for underlying inflation of between 2 percent to 3 percent over the medium term. The primary mechanism to increase inflation is by cutting interest rates. At the moment the annual rate of headline inflation is 1.5 percent while underlying inflation is 1.6 percent, both of which are below the target range.
“In fact, annual underlying inflation has grown at a rate below 2 percent for each of the past four quarters with inflation having not been that consistently weak since the RBA implemented its inflation targeting policy in the early 1990’s.
“Under normal circumstances, the RBA would likely be cutting official interest rates to stimulate consumption and push consumer prices higher. However, concerns of further inflating Sydney and Melbourne home values is likely a significant barrier to making this move.”
At the same time, the Australian economy is experiencing low inflation; weekly wages are increasing at their slowest annual pace on record.
“The high level of household debt certainly goes some way to explaining why households are spending less outside of housing in Sydney and Melbourne,” he said.
Kusher added that the ratios of household (885.7 percent) and housing (481.1 percent) assets to disposable income are currently also at a record high which indicates that although debt is extremely high, the value of the property that debt is held against is also great.
“Keep in mind; these assets are largely housing assets which are not liquid so utilising the value of the property is harder than if it was available as cash or in more liquid assets such as shares.
“When you combine all of these factors it becomes clear firstly that were it not for the strength in growth in dwelling values in Sydney and Melbourne, official interest rates could be even lower than their current record lows.
“The RBA has already stated that their forecast is for headline inflation to be back within their target range late this year with underlying inflation taking longer to reach the target range. The trend in wages growth remains subdued. Meanwhile, household debt is still rising.
“Based on these factors, it is likely to be some time before the RBA is in a position to raise interest rates and with household debt, at historic highs, we would expect the future increases to be slow and unlikely to result in interest rates returning to historical average levels.
