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Per Amundsen, Head of Research, Thinktank
The interest-rate hounds are barking loudly. There is mounting speculation that interest rates will have reason to rise as the global economy picks up, with the IMF predicting it to expand 6% in 2021, up from the 5.5% it had only forecast in January. At 6.5%, it would be the fastest growth recorded by the IMF since 1980.
Adding fuel to this speculation is an IMF predicting the world’s largest economy, the US, to rise at 6.5% this year, and the second largest, China, to more than 8%. If these growth numbers eventuate, it represents a massive economic turnaround from the COVID-19-induced recession of 2020, especially considering the pandemic is still raging in certain large economies, most notably India.
There seems little argument that economic activity in recent months has been more resilient than anticipated. Consumers and businesses have learnt new ways to adapt to public health measures, the rollout of COVID-19 vaccines is progressing faster in some countries than expected, and governments – most significantly the US where President Joe Biden recently signed a $US1.9 trillion ($A2.47 trillion) economic relief package – continue to aggressively stimulate their economies. All of which is grist to the mill for those predicting tighter monetary policy.
On the home front, a booming residential property market is an obvious indicator of the effect of cheap money, with the cash rate at a historic low – 0.10%. ABS figures show more than a record $28 billion in new home loans were written in January, about 12% more than December, also a record. In Sydney and Melbourne, housing prices jumped more than 2% each in February, while prices for some regional centres are outpacing their city cousins.
Yet the Reserve Bank – and other regulators for that matter – are reticent to intervene in the housing market. RBA Governor Phillip Lowe is on the record as saying monitoring housing prices is not part of the bank’s remit.
Although there must be concern in official circles about surging housing prices, Thinktank suspects they are weighing those risks against the fillip rising prices must be giving consumer confidence in an economy very reliant on domestic demand, to say nothing of the economic ripple effect of a strong construction sector while inflationary and wage pressures remain subdued.
A housing market that continues at this pace will, almost inevitably, attract official attempts to cool it down, most likely via APRA sending explicit signals to lenders to tighten their loan criteria, as happened during the last boom.
But for Thinktank the reluctance of regulators to intervene now is just one straw in the wind as to why we believe market speculation about rising interest rates is premature. Apart from anything else, that’s exactly the official position of the RBA. As Lowe said when he cut interest rates to a record low last November, he stressed that Australia was not out of recession and expected the official cash rate to remain at 0.10% per cent until 2024. At the same time, the RBA lowered its three-year bond rate target to 0.10% and announced it would buy $100 billion worth of government bonds over the next six months to lift inflation and encourage lending and investment.