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Why don't RBA raise rates if RBA is concerned about high housing prices?

Discussion in 'Business, Investment and Economics' started by helpme, Mar 8, 2017.

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  1. helpme

    helpme

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    I can understand RBA cannot cut rates out of concern for fuelling the high house prices in Sydney. In that case, why don't RBA simply hike rates? What is RBA worried about hiking rates?

    https://www.bloomberg.com/news/arti...es-as-sydney-house-prices-pose-stability-risk

    “There’s a recognition the housing market has strengthened even further, but there’s not a lot more in the statement,” said Matthew Peter, chief economist at QIC Ltd. in Brisbane, who sees high household debt constraining consumption and domestic demand. “The RBA is cornered. They can’t cut and they can’t hike.”
     
  2. Quant

    Quant

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  3. Smurf1976

    Smurf1976

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    They're between the proverbial rock and a hard place really.

    Raise rates and that may well kill the broader economy given that present growth seems to be quite narrowly based. Plenty of places aren't doing well - WA, SA, much of Qld, regional areas generally aren't doing overly well at the moment and the media has reported that a quarter of all growth is coming from a relatively small part of Sydney.

    I posted in another thread about unemployment differences between the states. NT, ACT, NSW and oddly Tasmania are doing better than the national average, Vic is right on the national average, things don't seem to be too good in Qld, SA, WA. So whilst some sectors of the economy and areas heavily dependent on them are doing well, others clearly aren't.

    Also if they do raise rates then that may well pop the housing bubble and then the RBA gets the blame as the "cause" of that happening.

    If they don't raise rates than that further inflates the bubble and leads to a bigger problem down the track.

    No easy way out that doesn't involve some pain for someone somewhere.

    I see all this as a consequence of not having had even a mild recession for a very long time, to the point that roughly half the workforce, and practically all of those who would be borrowing to buy their first home or a larger one to raise a family, has no memory of one ever occurring during their career thus far.

    We've got some very obvious distortions in the economy at the moment. $1 million for a basic home in Sydney meanwhile we can't even keep the lights on in Adelaide. That's getting pretty extreme but it's where we're at right now.

    I do fear that we're going to end up in an almighty mess when this inevitably unravels. The last recession was bad enough but whenever the next one arrives things will get pretty desperate I think. At least last time there was no real doubt as to the stability of the financial system as such, we didn't have families with mortgage debt 10+ times an average wage, we had infrastructure in pretty good shape, unemployment benefits were easily accessed by anyone without a job, we still had a lot of things being produced in Australia and so on. All changed now and not for the better.
     
    Modest, Bill M and helpme like this.
  4. Quant

    Quant

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    ScreenShot2532.jpgScreenShot2533.jpg


    If the Fed raises rate much more our rates have little choice but to go up imo , worth exploring fed to rba rate spread along with Aust 10y to US 10y yield spread since AUD free floated , outside a brief period of deflation aust rates have almost always been higher The price of debt in australia is rarely cheaper than US and id suggest even when cash rates in aust were lower i'd suggest consumer credit rates werent
     
    Last edited: Mar 8, 2017
  5. flynnmactier

    flynnmactier

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    Hi there, I agree that inflation and unemployment are mandates.
     
  6. Quant

    Quant

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    todays AFR

    Goldman Sachs predicts November interest rate rise


    The chance of a Reserve Bank of Australia rate hike before the end of the year has rocketed to almost 50:50 as a top forecaster predicted governor Philip Lowe will be forced to lean against the housing bubble to avoid a financial meltdown.

    Chance of a rate hike by December has shot up to 44 per cent, according to financial market pricing that leaves the bulk of big-bank economists still predicting rate cuts at risk of being blindsided by the Reserve Bank.

    Shifting expectations towards a 2017 rate hike - which would be the Reserve Bank's first increase since 2010 - follows a marked improvement in global economic data, rising yield curves, and the biggest positive income shock from commodity exports in more than six years.

    According to research by Goldman Sachs the Reserve Bank will be pushed into "leaning against the wind" of growing financial risks caused by rampant house price growth.


    The investment bank's chief Australian economist Andrew Boak has brought forward his forecast for the first rate hike to November from a previous estimate of February 2018, with another two hikes to come in May and November of next year.



    Dr Lowe and his board left the cash rate unchanged on Tuesday but issued a markedly more upbeat assessment of the global economy, and rising business investment - long regarded as the "missing link" in the economy's transition away from the resources boom.

    More than 400 basis points of rate cuts since the end of the terms of trade spike in 2012 have helped stoke economic growth in dollar-exposed sectors but also fuelled double-digit price gains in Sydney and Melbourne that many analysts consider a financial bubble.


    Mr Boak, in a note to investors, has calculated that Dr Lowe's stated goal of using monetary policy when necessary to reduce financial imbalances means there is now a 60 per cent chance of a move as early as November.

    "Imbalances in Australia's financial system have intensified and so has the RBA's attention to them," Mr Boak wrote, referring to the 105 per cent surge in Sydney house prices since 2009 and large increases in investor borrowing among several other signs.

    "All things equal, should financial imbalances intensify further over the coming years, there is a strong case that a more aggressive policy response will be required," he added.

    Goldman's modelling suggests the cash rate could reach around 3 per cent by early 2020.


    Mr Boak said his conclusions on coming rate hikes are not intended to be "directly prescriptive" towards the Reserve Bank.

    However, the research suggests rate increases are needed in order for Dr Lowe to be consistent with his public warnings about the limits of so-called macroprudential restraints on bank lending, which he has cautioned "may be less than fully satisfactory".

    "In our view it is likely that alternative approaches are now being seriously entertained."



    Read more: http://www.afr.com/news/economy/mon...erest-rate-rise-20170309-guu99k#ixzz4anM5TiWh
     
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