SYDNEY: Australia's central bank has warned that record low levels of interest rates risked stoking an unwelcome increase in home prices and debt, another sign that a further easing in policy was unlikely.
In minutes of its Sept. 2 meeting, where the Reserve Bank of Australia (RBA) kept its cash rate steady at 2.5 percent for a 13th straight month, the bank reiterated that the most prudent course was for a period of stability in rates.
"Accommodative monetary policy was supporting demand in some sectors of the economy, but policy also needed to be cognisant of the risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage," the minutes said.
Board members noted that there has been stronger competition in lending for housing and to large businesses, although this has not led to a general easing in mortgage lending standards and practices to date.
"For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and to a less extent in Melbourne," it said.
"Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later." Home prices grew by almost 11 percent in the year to August, driven in large part by demand for investment properties.
The RBA has kept rates low for more than a year to support an economy adjusting to the end of a mining boom.
In a speech on Tuesday, Assistant Governor Christopher Kent said low interest rates and robust population growth were underpinning demand in the housing market.
Low interest rates were also supporting consumption at a time when subdued conditions in the labour market were weighing on the growth of incomes.
"These developments, as well as growth in export industries such as tourism and education, are consistent with a pick-up in business conditions across a range of industries," said Kent.
NO MORE CUTS
But the RBA was also keenly aware there could be a danger to the economy should home owners react to any future fall in prices by cutting back their consumption.
The warning on home prices should only reinforce market expectations for a further long period of stable rates.
The central bank last cut in August 2013 and investors are wagering the next move will be upward but not until the middle of 2015.
"They are obviously signalling that they don't want to cut rates. But whether that means a rate hike is any closer, I doubt it," said Shane Oliver, chief economist at AMP Capital.
"The key problem facing the Reserve is the (strong) Australian dollar at the moment. As we've seen, the minutes have provided a small lift to the dollar."
Indeed, the central bank again cited the Australian dollar as a drag on the economy since it remained "above most estimates of its fundamental value."
It would therefore likely be content that the exchange rate has taken a spill in the last week or so, losing four US cents and briefly dipping below 90 US cents on Monday.
It was last closer to $0.9050, having drifted up from $0.9030.
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