The Reserve Bank of Australia has said the responsiveness of borrowers to changes in interest rates and house prices has been “unusually uncertain”.
When considering whether or not to reduce the cash rate further in its April monetary policy meeting, the Board discussed the various channels through which monetary policy was affecting the present economy, noting that it wasn’t affecting households as they may have expected.
“In assessing the operation of the cash flow channel in particular, [the Board] noted that the responsiveness of borrowers and savers to changes in interest rates and asset prices was unusually uncertain in a world of very low interest rates and high household leverage,” the minutes of the monetary policy meeting read.
"Members also saw advantages in receiving more data, including on inflation, to assess whether or not the economy was on the previously forecast path and allowing more time for the economy to respond to the reduction in the cash rate earlier in the year."
After cutting the cash rate to a record low of 2.25% in February, the Reserve Bank said there has been little change to housing market conditions.
“Members remained alert to the possibility that the low levels of interest rates could foster imbalances in the housing market,” the minutes read.
“The most recent data suggested that activity in the housing market had remained strong, but there had been little change to housing market conditions overall or in the growth of housing credit in early 2015. Although prices continued to rise rapidly in Sydney and, to a lesser extent, Melbourne, trends elsewhere were more varied.”
Despite the uncertainty over what another rate cut may do to the housing market – whether it will overstimulate it or leave it subdued – the central bank concluded that further monetary policy easing may be appropriate “to foster sustainable growth in demand and inflation consistent with the target”. The Board will meet again on May 5.
