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‘RBA not responsible for asset prices’, governor says

  • February 05 2021
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‘RBA not responsible for asset prices’, governor says

By Maja Garaca Djurdjevic
February 05 2021

RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of low interest rates.

Philip Lowe

‘RBA not responsible for asset prices’, governor says

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  • February 05 2021
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RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of low interest rates.

Philip Lowe

“I can’t say at what value the ASX would be too high,” Dr Lowe said in front of Parliament’s standing committee on economics on Friday.

“We shouldn’t try and control asset prices,” the governor added. 

Speaking about property prices and their predicted surge, Dr Lowe similarly said: “The RBA does not, and should not, target housing prices. Instead, our focus is on the lending that is used to purchase housing.” 

Questioned about the point at which the RBA will act to prevent the creation of “unsustainable prices”, Dr Lowe reiterated that the issue for the central bank would be if people didn’t borrow sensibly.

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“We shouldn’t try and control asset prices.

“What we can have influence on is how much borrowing happens on the back of those rising prices,” Dr Lowe said.

“We would be concerned if there were to be a deterioration in these standards, but there are few signs of this at the moment,” he added.

Last week, the Reserve Bank of Australia (RBA) confirmed that it will keep the cash rate at 0.1 per cent at its first rate meeting of the year.

The board also revealed that the interest rate will likely remain at a record low until 2024, at least.

“The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.

“The board does not expect these conditions to be met until 2024 at the earliest,” Dr Lowe said.

Reiterating his stance on interest rates, Mr Lower confirmed on Friday that the chances of the RBA hitting its 2 per cent to 3 per cent target during his term are “not high”.

“My board is doing everything it can to achieve it.”

Property prices to soar

According to analysts, the record-low interest rate will send property prices soaring.

Shane Oliver, chief economist at AMP Capital, expects that this decision will leave mortgage rates at record lows, which, along with government home buyer incentives and economic recovery, will continue to push average property prices higher.

“Headline inflation will rise due to base effects as the collapse in petrol prices and childcare costs drops out of annual comparisons, but underlying inflation will remain low at around 1.5 per cent or less out to next year.

“This in turn will see the RBA leave rates at 0.1 per cent probably out to end 2022 at least,” Dr Oliver said.

In a document released by the RBA last month, following a Freedom of Information request, the bank predicted that a permanent 1 percentage point (100 basis point reduction) cut in the official rate could increase real housing prices by 30 per cent over three years.

Dr Lowe has since said, on several occasions, that “it remains to be seen how long this will continue”.

“Sustainable increases in asset prices support household balance sheets and encourage spending through positive wealth effects.

“Higher housing prices can also encourage additional residential construction,” Dr Lowe said.

‘RBA not responsible for asset prices’, governor says
Philip Lowe
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About the author

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Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

About the author

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

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