A top Australian central banker warned on Tuesday that housing prices could rise too fast if interest rates were kept low for too long, fanning speculation that monetary policy would be tightened as soon as November. Expectations of rate hikes had already received a boost after an influential columnist said it was almost certain rates would rise to 3.25 percent in November, and to 3.5 percent in December.
Australia's economy has proved surprisingly resilient this year, allowing the government to announce a smaller budget deficit than projected just a few months ago and leading the Reserve Bank of Australia (RBA) to foreshadow a timely rate hike. "Nothing is guaranteed, but the scenario of back-to-back 25 basis point hikes in November and December should be taken seriously," said Rory Robertson, interest rate strategist at Macquarie. "In the next few weeks, as in the past few months, good news on the economy will be bad news for interest rates."
The RBA's monetary policy board meets next on October 6 and few expect it to lift its 3.0 percent cash rate at that point. But based on overnight indexed swaps, investors are pricing in a 64 percent chance of a 25-basis-point rate hike in November, and are more than fully priced for December. Investors had seen around an even chance of a November rate hike, but that increased after columnist Terry McCrann wrote that, absent a shock, the RBA was almost certain to raise rates by 25 basis points in both November and December.
McCrann has a mixed track record on rate moves but has been right enough times in the past for investors to suspect he has inside sources at the RBA, making them sensitive to his calls. Governor Glenn Stevens said on Monday rates will be raised in a timely manner, but declined to say when the first hike would be. He added keeping rates at record lows for too long would create economic imbalances.
That was echoed on Tuesday by Anthony Richards, head of economic analysis at the RBA, who told a housing forum that mortgage rates were unlikely to stay at their current low levels indefinitely and there was a risk housing prices could rise too fast. Unlike the United States and UK, where house prices have tumbled amid the global downturn, Australian house prices have held up remarkably well, rising 4.2 percent in the March to June quarter. "This is a good thing, because of the macroeconomic difficulties that have accompanied those price falls in some countries," Richards said.
"But, looking forward, the risk is that we might move towards undesirably strong growth in Australian housing prices." Record levels of immigration and the highest population growth in 25 years have meant there were more people looking for homes at a time when construction has been running well below historical norms.
Underlining the strength of the economy, Treasurer Wayne Swan announced the government's budget deficit had come in A$5 billion ($4.4 billion) smaller than expected at A$27.1 billion in the year to June 30. The government's net debt position stood at A$16.1 billion for the year, a hefty A$11.5 billion better than forecast.
"The budget will move back into surplus by the end of 2012-13, ahead of the government's previous estimate of the end of 2015-16," Citi analyst Joshua Williamson said. That assumption was based on a government commitment to cap spending at 2.0 percent a year above inflation. UBS Chief Economist Scott Haslem said he expected unemployment to peak about 2 percentage points below the official 8.5 percent forecast, which also suggests a lower bond issuance and an earlier return to surplus budgets.