Governor Philip Lowe said he wouldn’t be surprised if house prices fall 10%.
The Reserve Bank of Australia will consider hikes of 25bps or 50bps at its Oct 4 meeting as it looks for rates to eventually “cycle” between 2.5%-3.5%, Governor Philip Lowe told a parliamentary committee.
The RBA is approaching more normal monetary settings and the case for large adjustments in rates has “diminished”, Lowe said. “I think at our next board meeting we'll be considering whether it’s a 25bps or 50bps increase.”
Rates, while “still on the low side”, are returning to a normal range, said Lowe, adding “I think we’ll cycle around some number between 2.5% and 3.5%, it’s hard to be specific” and that the neutral real rate is likely “at least positive.”
Assistant Governor Luci Ellis will give a speech next month on models used to estimate the neutral real rate.
House prices could fall by a "cumulative 10%” after rising 25% in two years, Lowe said. Strong consumer spending despite weak confidence was a “puzzle” but high savings provide a buffer to falling real wages.
Lowe was “doubtful” 3.5% unemployment was sustainable as businesses struggle to find workers (See MNI INSIGHT: RBA Still Wants Wage Growth, Just Not Too Much).
Acknowledging forward guidance relating to the abandoned yield curve control policy may have been a mistake, Lowe said “language about the timing [of future rate rises] will be vaguer”.
A review of RBA bond purchases will be released next week and a forward guidance review later this year. The Australian dollar rose slightly as Lowe spoke.