Reserve Bank Governor Glenn Stevens told a New York audience there is too much focus on the ‘exuberant’ Sydney property bubble. Addressing The American Australian Association luncheon, Stevens said: “Then there are dwelling prices, which, at a national level, have already risen considerably from their previous lows, at a time when income growth has been slowing. Popular commentary is, in my opinion, too focused on Sydney prices and pays too little attention to the more disparate trends among the other 80 per cent of Australia. That said, it is hard to escape the conclusion that Sydney prices – up by a third since 2012 – look rather exuberant.”
As we have reported over the past couple of months, the central bank has been unable to cut the official cash rate further after igniting the property bubble in February with a 25 basis point cut. Meanwhile the rest of the “real economy” suffers. Mr Stevens says “A balance has to be found.”
Last night’s comments could be seen as an indication the Reserve Bank will look beyond, or side-step, the Sydney property bubble when it sits in two weeks time to consider the official cash rate setting. But it could also be more jawboning, as the risks in doing so are too high to ignore. The central bank is worried about our record level of household debt, the highest in the Advanced world according to Barclays.
Stevens remarked last night, “The extent to which further increases in leverage should be encouraged is not easily answered, but nor can it be conveniently side-stepped. Even if we chose to ignore it, monetary policy’s ability to support demand by inducing households to bring forward spending that would otherwise be done in future might well turn out to be weaker than it used to be. For a start, households already did a lot of that in the past and, in any event, future income growth itself looks lower than it did a few years ago.”
And then there is the strong message for our dysfunctional government. The RBA can’t do all the heavy lifting via monetary policy:
“Across much of the world, too much weight is being put on monetary policy to try to achieve what it can’t: a durable and sustainable increase in growth, in an environment where private leverage is already rather high or even too high. Monetary policy alone won’t deliver that.”
Will the central bank cut next month? – or is the bank out of ammo and crying out to our government for some intervention?