Lowe indicates RBA won’t be hasty to cut

Adam Smith 18 October 2016

cautionNew Reserve Bank governor Philip Lowe has used his first speech to argue for flexibility in the bank’s inflation targeting.

Speaking to Citi’s annual Australia and New Zealand Investment Conference in Sydney, Lowe argued that the RBA wouldn’t be quick to cut rates merely to push inflation back within the bank’s 2-3% target band.

“Achieving the quickest return of inflation back to 2.5 % would be unlikely to be in the public interest if it came at the cost of a weakening of balance sheets and an unsustainable build-up of leverage in response to historically low interest rates,” he said.

Lowe defended the RBA’s two rate cuts this year, and said the decision to cut was balanced against concerns about ballooning house prices.

“Over the course of 2016, there has been some lessening of the concerns that were building up last year. Aggregate credit growth slowed, as did the rate of housing price appreciation. Lending standards were also tightened. These developments meant that the Board felt that the lowering of the cash rate would improve prospects for sustainable growth and achieving the inflation target without creating unacceptable risks on the financial side,” he said.

But Lowe conceded that the housing market was “a complex picture”, with rapid price appreciation in some areas and price declines in others.

“Prices seem to be increasing quite briskly again in some areas, although are falling in others. Growth in rents is very low and there is a big increase in housing supply still to come. To add to the picture, credit growth is still exceeding income growth, although by a smaller margin than last year. It is also noteworthy that much of this credit is being used to finance new housing construction rather than consumption,” Lowe said.

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