“Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening” RBA governor Glenn Stevens. Photo: Louie Douvis
Reserve Bank governor Glenn Stevens says if interest rates were to move shortly, Australians would see a cut rather than increase.
Speaking at a conference in Melbourne, Mr Stevens also defended the RBA’s decision not to compensate consumers for recent mortgage rate hikes, saying the economy doesn’t need the boost and most households could absorb the changes.
He says the decision by Australia’s major banks to lift their mortgage rates recently had the equivalent impact of removing roughly half of one 0.25 percentage point monetary policy change.
As such, they took back a quarter of the extent of interest rate easing seen since the start of this year.
“The question … [is] whether the recent changes in mortgage rates results in an effective set of financial conditions that is ‘too tight’ for the economy,” Mr Stevens told the Melbourne Institute economic and social outlook conference on Thursday.
“[But] the actions of those banks that have lifted mortgage rates over recent weeks reverse a little under half of this year’s decline for floating rate mortgages for owner occupiers and have no effect, at this stage, on the 15 per cent of loans with fixed rates.”
“For investors in housing, these actions and those a month or two earlier reverse the effects of this year’s monetary policy easing but, of course, this was the lending that had been growing most quickly. Business loan rates have not risen.”
He said conditions outside the mining industry have been slowly improving, not deteriorating.
“So it is not as though the increases in mortgage rates are compounding the effects of a serious deterioration in economic conditions overall,” he said.
“We are still growing. It would be good if the growth was a bit stronger, but nonetheless over the past year the non-mining side of the economy has generated respectable growth in employment,” Mr Stevens said.
Interest rates would need to remain low and might yet be cut again.
The official cash rate is currently 2 per cent.
“Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening” Mr Stevens told the conference.
“The rate of inflation is clearly no impediment to easing. The housing market may be calming, lessening risks from that source, though by how much and how persistently we cannot yet know.”
The governor said measured across all loans, the rate hikes by Westpac, the Commonwealth Bank, the ANZ, and National Australia Bank, had taken back “perhaps a quarter of the extent of interest rate easing seen since the start of this year, and a smaller proportion of the total easing in lending costs seen over the past two years.”
The increase was from the lowest mortgage rates “any current borrower will have ever seen”.
“There are still a number of mortgage products with rates not much above 4 per cent, even a few advertising a ‘3’ before the decimal point,” Mr Stevens said.
He also said a significant proportion of households were ahead of schedule on mortgage repayments, in large part because they did not lower their payments as interest rates fell.
Most were unlikely to need to part with extra cash each month as a result of the changes.
“At this point, then, my preliminary assessment is that the macroeconomic effect of these actions in themselves may not be large. It is one part of a much bigger and evolving landscape. Nonetheless, the Reserve Bank Board will keep this matter, and that broader landscape, under careful review,” he said.
“Let me be clear that in making these comments I am not offering an endorsement of the banks’ actions. Nor should an assumption that shareholder returns must not decline as a result of the effects of supervisory measures, or any other factor, simply be accepted without question.”
“The ‘right’ rate of return for bank shareholders is, as others have observed, an open question. It is not a constant of the universe.”