RBA could move on household debt but not its job to target house prices, governor says
The Reserve Bank governor, Philip Lowe, says the bank is considering policy measures to rein in ballooning household debt if it becomes a risk to economic stability, but says it is not the bank’s job to target house prices.
In a speech to the Australian Farm Institute conference in Toowoomba on Thursday, Lowe also cast doubt on the government’s strategy for wage rises, saying even in areas where the labour market was tight, pay packets were not increasing.
The remarks come as Australia’s unemployment rate dropped to 5.1% in May, returning to pre-pandemic levels with 115,200 people joining the workforce in the past month.
The 0.4% drop in the unemployment rate to 5.1% is now 0.2 percentage points below the 5.3 per cent recorded in March 2020.
As Australian house prices soar across the country, particularly in regional areas, Lowe said the increase in household borrowing that had accompanied the boom was on the bank’s radar.
He said the Council of Financial Regulators, which includes the RBA, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and Treasury, had discussed possible policy responses if “household borrowing substantially outpaced growth in household income.”
“This is not the case at the moment, but the council did discuss possible policy responses to a scenario in which rapid growth in household debt posed heightened risks to the future stability of the economy,” Lowe said.
“The RBA does not, and should not, target housing prices. We do though have a strong interest in trends in household borrowing, especially given the already high level of household debt in Australia.
“It is important that lending standards remain sound in an environment of low interest rates and rising housing prices.”
The warning from Lowe comes as the government attempts to pass new legislation which would wind back the Gillard government’s responsible lending laws, which the Treasurer, Josh Frydenberg, has argued is necessary to help the country’s economic recovery.
The legislation is currently before the Senate.
Lowe, who said the nation’s economy remained firmly in its recovery phase after last year’s short-lived recession, said that how people responded to the change in their balance sheets as a result of house price rises would impact the next stage of recovery.
“If households were to run down their additional savings quickly or if higher housing prices spurred more spending than usual, a stronger economic path than the one we have envisaged could eventuate,” Lowe said.
“On the other hand, it is possible
that households sit on these extra savings for a long time and restrain their spending because of uncertainty about the future. If so, this would slow the recovery. So this is an issue we are watching carefully.”
He said one of the “standout features” of the past year had been the large increase in household saving, which had spiked to 22% – the highest level on record.
But amid government hopes that households begin spending to consolidate the V-shape recovery under way, Lowe also pointed to the issue of persistently low wage growth, even in areas of labour shortages.
The government has pegged its wages policy on reducing the unemployment rate to below 5%, saying once the demand for workers increases beyond this point, wage rises will inevitably follow.
Lowe says that despite signs of a tightening labour market, wages growth and inflation “remain subdued and there have not been upside surprises”.
“It is noteworthy that even in those pockets where firms are finding it hardest to hire workers, wage increases are mostly modest,” Lowe says.
Lowe suggests that the reason for this is that businesses are operating in a highly competitive market, leading them to pursue other “non-wage strategies” when faced with labour shortages rather than paying more for workers.
Others are also adopting a “wait and ration” approach, hoping that labour market conditions ease, perhaps when the borders reopen, “and until then, ration output,” Lowe said.
“For some, this is a better option than paying higher wages and driving up their own cost base.”
He said it was unlikely that the factors contributing to “limited upward pressure on wages”, would wane quickly, making the bank’s target inflation rate of between 2 and 3% also unlikely in the short term.
Only once this inflation level is reached will the bank consider lifting the cash rate, with Lowe suggesting this could happen by 2024.
“The board wants to see the recent recovery transition into strong and durable economic growth, with low unemployment and faster growth in wages than we have seen recently. Over time, this will help achieve the inflation target,” Lowe said.
“As part of the board’s overall strategy, it will not increase the cash rate until inflation is sustainably within the 2–3% target range. “