The nascent rebound in Australian property prices was among the reasons the Reserve Bank opted to lift its main interest rate, surprising markets and most economists, the bank’s governor, Philip Lowe, has told a dinner in Perth.
The comments, coming hours after the RBA raised its cash rate 25 basis points to an 11-year high of 3.85%, expand on the short statement Lowe issued to accompany the hike.
Lowe said the rate pause at April’s board meeting after a record 10 consecutive increases had been to give the central bank “more time to assess the pulse of the economy and the outlook”.
“Since [the April meeting], we have seen further evidence that the Australian labour market is still very tight, that services price inflation is proving to be uncomfortably persistent abroad, and that asset prices – including the exchange rate and housing prices – are responding to changes in the interest rate outlook,” he said.
Lowe’s reference to the recent increases in property prices in most state capital city markets goes further than Tuesday’s statement.
In that, the only reference was to an “earlier decline in housing prices” combining with higher interest rates and cost-of-living pressures to lead “to a substantial slowing in household spending”.
CoreLogic, Domain and other data services are reporting that national home values have arrested declines and are now bouncing back. While the RBA typically doesn’t set rates according to the level of home prices, they do pay heed to the way households adjust spending according to how wealthy they feel.
The central bank also tracks rental prices closely, not least because they feature in the basket of goods and services that comprises the consumer price index.
In the March quarter, rents recorded the largest annual rise since 2010, reflecting strong demand amid low vacancy rates across the country, the Australian Bureau of Statistics said last week. “Rental price growth continues to increase in Sydney and Melbourne with both cities recording their strongest annual rises since 2012.”
Lowe also referred to rents in his Perth speech.
“There is a very limited supply of rental properties and rents in Perth have been rising even faster than elsewhere in the country,” Lowe said, adding “on a more positive note, unemployment in Western Australia has generally been lower than in the rest of the country”.
While goods price increases were slowing, “services and energy price inflation is still high and likely to remain so for some time”, Lowe said.
“Looking overseas, we see worryingly persistent services price inflation,” he said. “It is possible that circumstances might be different here in Australia, but the experience abroad points to an upside risk, especially given the high degree of commonality across countries in inflation dynamics recently.”
The US Federal Reserve is expected to respond to similar forces later this week by raising its key interest rate 25 basis points.
Lowe said Australia’s 7% March quarter inflation rate was “confirmation that the peak in inflation in Australia is now behind us”. Still, the bank had not changed its view “that it will be some time yet before inflation is back in the target range [of 2% to 3%]”.
