RBA finds no evidence monetary policy is more potent in Australia than elsewhere

2:51 am Monday, November 18th, 2024

SYDNEY (Reuters) – Australia’s central bank has found no evidence that monetary policy is more potent in the country than elsewhere given households have ways to manage interest rate risks, even though they have more debt exposed to variable rates.

In a speech in Canberra on Monday, Reserve Bank of Australia Assistant Governor Christopher Kent said mortgage arrears were trending up but they remained low and were at similar levels to those in the United States where most mortgages are fixed on 30-year terms.

In Australia, about 80% of mortgages are on variable rates while most of the fixed rate mortgages only last for two years or less.

“This outcome reflects several features of the Australian mortgage market that collectively leave most borrowers with buffers that help them to manage through a period of higher interest rates,” said Kent.

He noted households pay down their loans more quickly than required, with extra payments in their offset and redraw accounts equal to a bit above 20% of the total value of the outstanding mortgage debt.

The RBA has held rates steady for a year, judging the current cash rate of 4.35% – up from the 0.1% during the pandemic – is restrictive enough to bring inflation to its target band of 2-3% while preserving employment gains.

The peak rate of 4.35% is lower than in many other economies in part because the RBA reckoned borrowers would be feeling the rate pain more quickly than elsewhere given the prominence of variable-rate mortgages.

Kent also used part of the speech to shed some light on the RBA’s reaction function and forward guidance that is more “infrequent, short-term and qualitative” than many other central banks.

“I think it would be worth reviewing the RBA’s approach to forward guidance from time to time, including to consider other ways that the RBA might clarify the nature of its reaction function,” he said.

The RBA has refrained from issuing forward guidance given it was something similar that cost the job of the previous RBA chief, Philip Lowe, who in 2021 told borrowers rates were unlikely to rise until 2024.

(Reporting by Stella Qiu; Editing by Shri Navaratnam)