Reserve Bank awaiting the impact of its monetary policy

The Reserve Bank of Australia is waiting to see the impact of its monetary policy on the Australian economy.

Indicators suggest that economic recovery is running at a faster pace than had been forecast.  This is due to record low interest rates and the Government’s ongoing fiscal support and containment of the virus.

This means that home buyers are responding to the unprecedented levels of stimulus available.

The national home value index went up two consecutive months of growth in November. Settled sales are also expected to be higher over the same period a year ago.

Interest rates are also set to remain at record lows over a longer period, so attention is focussing on how to manage the associated risks while enabling the economy to benefit from the stimulus.

The logical outcome of the low interest rates is increasing asset prices. It is hoped that the wealth effect will flow on to other areas of the economy as households increase their spending.

A higher household debt level or a rise in riskier types of lending, however, could trigger a response from the regulatory authorities.

Earlier macroprudential financial policies aimed at ensuring the stability of the financial system have had an immediate dampening effect on housing market conditions.