(Bloomberg) -- Australia’s central bank is worried an extended period of very low interest rates could spur borrowers to take on more debt than they can handle -- particularly if lending standards slip and risk appetite increases.
Documents released Friday under a Freedom of Information request show the Reserve Bank of Australia saw risks in its decisions to cut the key interest rate to 0.10%, introduce a lending facility for banks and buy government bonds. It said the Council of Financial Regulators would act to control risks if needed.
The RBA cited research that a permanent 100-basis-point reduction in the cash rate increased real housing prices by 30% after about three years.
Australia’s housing market proved relatively resilient to the economy tipping into its first recession in almost 30 years, with prices easing before bouncing back at year’s end. The ability to work remotely boosted property markets outside the big cities. Home prices in regional areas jumped more than three times capital city prices.
The FOI documents look at the broader impact of easy policy on savers, depositors and self-funded retirees. The RBA said that over the past five years income from interest, dividends and superannuation had fallen well below longer-run averages, mainly due to low rates. Yet, it said this is offset somewhat from higher asset prices.
Among the other risks of low rates, the RBA cited:
- Loan-to-valuation ratios above 85% for housing increasing, though still well below levels seen before 2015. This, it said, partly reflects an increased share of loans to first home buyers, who typically have smaller deposits than repeat buyers; and
- That price rises could induce large amounts of new property construction, which could create an overhang of excess supply, causing prices to fall further
In a separate FOI document on inequality caused by monetary policy settings, the RBA looked at a recent International Monetary Fund paper that recommended central banks explicitly target consumption inequality alongside their inflation and unemployment objectives.
“Whether and how the central bank should account for inequality in its decision-making remains an open question,” the RBA said in response. While the IMF’s paper showed it could be welfare-improving in theory, “the generalisability of this result is unclear.”
Nevertheless, the RBA acknowledged, there has been growing interest in the topic among central banks, with the Federal Reserve’s recent framework change potentially “one way central banks can implicitly target inequality without the perception they are overstepping their existing mandates,” the RBA said.