Interest rates can remain low if property over exuberance curtailed: RBA's Glenn Stevens

The Reserve Bank of Australia governor Glenn Stevens expects interest rates can remain low for some time yet, as long as housing market “pockets of potential over-exuberance” and "over excitement" remain in check.

The need for stronger growth outside the resources sector justified the present low interest rate settings, he said in a speech to the Committee for Economic Development in Melbourne last night.

“Inflation is well under control and is likely to remain so over the next couple of years,” he said.

“In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet.

“But for accommodative monetary policy to support the economy most effectively overall, it’s helpful if pockets of potential over-exuberance don’t get too carried away.”

The CommSec chief economist Craig James noted the Reserve Bank Governor delivered a powerful speech that could only be described as a “call for action”, targeted at the conservativeness of the business sector.

"It implores Australian business people to believe in themselves and take greater risks," James said.

"It was the type of speech that a coach delivers to his players.

"It is definitely a speech worth reading."

James further noted the Reserve Bank Governor attempts to set the record straight with his views on housing, pointing to three quotes within the speech

“Credit outstanding to households in total is rising at about 6–7% per year. I see no particular concern with that,” he said.

“It is not clear whether price increases will continue or abate. Furthermore, it is not to be assumed that investor activity is problematic, per se. A proportion of the investor transactions are financing additions to the stock of dwellings, which is helpful. It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.”

“Nor, let me be clear, have we seen these dynamics, thus far, as an immediate threat to financial stability. The Bank's most recent Financial Stability Review made that clear. So we don't just assume that all this is a terrible problem.”

The Reserve Bank Governor does acknowledge that there are signs in the investor housing market where “some people might be starting to get just a little overexcited”. 

The Reserve Bank is working with other agencies on reviewing lending standards. But he makes clear the purpose of the review. 

“Let's be clear what this is not about," says Stevens.

"It is not an attempt to restrain construction activity. On the contrary, it is an attempt to stretch out the upswing.

"Nor is it a return to widespread attempts to restrict lending via direct controls.”

The Reserve Bank Governor makes it clear that rates aren’t set to rise to address the strong growth in investor housing lending.

“The economy has spare capacity. Inflation is well under control and is likely to remain so over the next couple of years," Stevens advised.

"In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet

"But for accommodative monetary policy to support the economy most effectively overall, it's helpful if pockets of potential over-exuberance don't get too carried away."