The Reserve Bank governor has assured borrowers and investors that any rate rise will be flagged well in advance.
In a speech to an economics conference in Hobart, Glenn Stevens gave the clearest indication yet that an official interest rate rise was a long way off and would be flagged months ahead of it occurring.
“Long before any thought were to be given to an increase in rates, it would probably be sensible for the board to cease references to a future ‘period of stability’ and revert to the more normal formulation that the stable policy settings ‘remained appropriate’ or something like that,” he said.
Mr Stevens was referring to the concluding paragraph in the statement he puts out after every RBA board meeting, which for the last several months has referred to a “period of stability in interest rates” being the most prudent course.
In his speech, Mr Stevens has effectively informed market economists, economic commentators and traders that they should watch for the removal of this key phrase before they start expecting the possibility of a rate increase.
However, to avoid too much forward guidance, he also noted that the removal of the phrase would not necessarily “imply any particular change in the bank’s views about the future course of policy.”
Overall, Mr Stevens observed that markets appear to have got the bank’s message about the likely direction of interest rates.
“Overall, I judge that language to have served its intended purpose,” he said.
“Present market pricing suggests that market participants expect interest rates to remain low for some time yet. If anything, pricing in recent days has suggested that, if a move were to occur over the next several months, markets expect it would be down, not up.”
Housing, currency commentary
Mr Stevens used this speech to economists to address several other issues of contention around the Reserve Bank’s thinking and the language of its statements.
On the Australian dollar, the RBA governor said the removal of the word “uncomfortable” did not mean the bank was happy with the current level of the exchange rate, which yesterday hit an eight-month high of 95 US cents.
Mr Stevens offered some free advice to currency traders, warning that they were underestimating the risk of a significant fall in the Australian dollar at some point.
“There is little doubt that significant parts of the trade-exposed sectors still find it quite ‘uncomfortable’: it continues to exert acute pressure for cost containment, productivity improvement and business model change,” he said.
“When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents.”
However, Mr Stevens is more relaxed about the level of home prices in Australia – except in his hometown of Sydney.
Overall, he says some rise in prices was to be expected after the falls between 2010-12 given 50-year low interest rates, but the 6-7 per cent growth in outstanding home loans is not a cause of concern for the bank.
However, he says the Sydney market is a different kettle of fish.
“Investors should take care in the Sydney market, which is the main area where a large increase in borrowing has been occurring,” he warned.
“The total value of credit approvals for investor loans in New South Wales as a whole is about 130 per cent higher than in 2008, and it is in the investor segment where there has been evidence of some increase in lending with loan-to-value ratios above 80 per cent in the past couple of quarters.”
Mr Stevens says there are signs that some segments of the housing market have been “calming down” lately, and the rate of growth in Sydney home prices has also eased.
He says the bank is watching to see if this is a temporary seasonal phenomenon or a longer lasting trend, with the RBA hoping for the latter.