Interest Rate Stability Ahead

Interest rates are likely to remain low for some time, according to the RBA
Photo: Danausi

The Reserve Bank (RBA) released the minutes of its March monthly board meeting earlier this week.

At the meeting the RBA board decided to keep official interest rates on hold at 2.5 per cent and flagged that a period of interest rate stability was the most likely course of action from here.

Perhaps the most interesting portion of the minutes related to financial stability and the housing sector.

“Members noted that rising housing prices and household borrowing were expected results from the monetary easing that had taken place.

While these factors were helping to support residential building activity, they also had the potential to encourage speculative activity in the housing market.

Lending to housing investors had been increasing for some time in New South Wales, and over the past six months it had also picked up in some other states.

While such a pick-up would be unhelpful if it was a result of lenders materially relaxing their lending standards, current evidence indicated that there was little sign of this occurring.

Members noted that the recent momentum in households’ risk appetite and borrowing behaviour warranted close observation, but agreed that present conditions in the household sector did not pose a near-term risk to the financial system.

Members discussed the experience in other countries where macro prudential tools had been utilised to slow demand for established housing and their possible application in Australia.”

Of course, it is important to remember that the Australian Prudential Regulation Authority is in charge of overseeing ADIs in Australia and it would largely be their responsibility to implement and manage any macro prudential tools in Australia.

Households and Businesses More Prepared to Borrow

The Australian Bureau of Statistics (ABS) released lending finance data for January 2014 late last week.

The data showed that lending by Australian ADIs continues to ramp up. The total value of lending finance increased by 1.7 per cent in January and was 28.3 per cent higher in January 2014 than it was in January 2013.

Year-on-year, lending for owner-occupier housing has increased by 18.3 per cent, personal finance has increased by 5.3 per cent and commercial finance is up 40.2 per cent; however, lease finance is -18.8 per cent lower over the year.

The rise in lending finance indicates that households and businesses are showing a greater preparedness to borrow, which bodes well for an ongoing economic improvement.