Is the RBA creating a housing and equity price bubble?

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November 04 2020
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The RBA has reduced the official cash rate to a new record low, with an economist fearing it could lead to a major asset bubble.

Following an out-of-cycle rate reduction at the start of lockdowns in March, the RBA has followed market consensus and reduced the official cash rate to 0.10 per cent, down 15 basis points.

BetaShares’ chief economist, David Bassanese, believes the “drastic action” by the Reserve Bank of Australia (RBA) to reduce record-low interest rates and further quantitative easing is a last-ditch effort to hit inflation targets at the risk of a major bubble in housing and equity prices.

“Given the economic outlook has improved, rather than worsened, since the RBA last cut interest rates, it suggests the policy move is not based on new information but rather a major change in policy approach,” Mr Bassanese noted.

“Fear of the impact of persistent low interest rates on the financial system has been jettisoned, as has the fear of creating runaway asset prices.”

He pointed out that the RBA decided to now follow the rest of the world in trying to get the cheapest interest rates as well as aggressively printing money through quantitative easing.

“Spending $100 billion to buy long-term government bonds also won’t do much to lower key local lending rates, which are more sensitive to already rock-bottom short-term rates.

“That said, with interest rates now effectively zero, bond buying is the RBA’s new flexible policy tool. It can and likely will announce even greater bond buying in the months ahead – if only to continue to be seen to be doing something if the economic recovery falters,” Mr Bassanese said.

The economist noted that the RBA has followed its global peers in not only reducing the rate, but promising to keep it lower for longer.

“If, as I suspect, inflation continues to remain stubbornly low even as the economy improves – reflecting ongoing structural factors such as technology and globalisation – it remains to be seen whether an emerging asset bubble ultimately causes the RBA to lift rates well before its inflation target has been achieved.”

“Indeed, perhaps the greatest economic impact of the RBA’s bold new approach will be on asset prices – as the virtual guarantee of persistent low interest rates will push up valuations as investors chase yield and greater leverage,” Mr Bassanese concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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