RBA signals more pain for home buyers

“I want to emphasise though that we are not on a pre-set path. How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” he said.

“Many households have not previously experienced a period of rising interest rates. Households are also experiencing a decline in real incomes because of the higher inflation and some of the large gains in housing prices over recent years are being unwound.”

“Given these various considerations, we will be watching household spending carefully as we chart our way back to 2 to 3 per cent inflation.”

There has been some criticism of the bank for lifting interest rates on people who sharply increased their borrowing levels through the COVID-19 recession. The average new mortgage in NSW climbed to an all-time high of $800,000 while in Victoria it has reached $650,000.

But Lowe said inflation, which the bank now believes will peak around 7 per cent in the December quarter before falling next year, had to be brought under control.

He said while many of Australian’s inflation pressures at present were being transmitted from overseas, there were domestic factors at play including the strong growth in domestic spending.

“The board is committed to doing what is necessary to ensure that inflation returns to
the 2 to 3 per cent target range over time,” he said.

“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues people’s savings. It is also regressive, hurting most those who are least well-equipped to protect themselves.”

The bank on Tuesday also released a review of its yield target policy that it used during the recession to keep the interest rate on government debt at 0.1 per cent.


Through most of the recession, the bank was able to keep these rates at 0.1 per cent but in the final weeks of the policy there was a sharp lift as finance markets started pricing in the risk of higher inflation.

The review found the end of the program was “disorderly” and caused reputational damage to the RBA.

Lowe said that in hindsight, it could be argued there was too much focus on downside risks throughout the COVID-19 recession which then influenced the RBA’s policies.

He signalled the bank was unlikely to use a yield target policy in the same way again.

“The board has not ruled out using a yield target again in extreme circumstances, but views the probability of doing so as low,” he said. “The use of a yield target in some form would need to be evaluated against other policy options, including a bond purchase program. Such a program offers more flexibility, but it does carry other risks.”

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