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RBA warns on home loans, holds rates

 

The Reserve Bank of Australia has been forced to fire a stern warning at mortgage lenders, knowing any change to interest rates is a risk to fragile economic growth, economists say.

The central bank held its benchmark interest rate steady at a record low of 1.5 per cent at its April board meeting on Tuesday, in line with the forecast in an AAP survey of 12 economists.

RBA governor Philip Lowe is concerned soaring housing prices are pushing up the household debt to income ratio - which he said was at already at a record high earlier this year.

Dr Lowe applauded recent moves regulatory moves to cool the housing market: the Australian Prudential Regulation Authority has limited interest-only loans to 30 per cent of new mortgage lending and the Australian Securities and Investment Commission will monitor lenders and mortgage brokers recommending those loans to customers who can't afford them.

In the RBA's most strongly-worded statement on the mortgage market in recent memory, Dr Lowe implored lenders to do their part to help maintain financial stability.

"Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions," he said.

The central bank boss also flagged that he believed a reduced reliance on interest-only housing loans in the Australian market would "be a positive development".

JP Morgan economist Sally Auld said the RBA issued the warning because any interest rate hike could curtail household spending, which currently is propping up patchy economic growth.

Since the RBA's last monthly meeting, fresh data also showed that in February unemployment worryingly ticked up to 5.9 per cent and retail spending had fallen by 0.1 per cent.

Ms Auld said it seemed like the central bank's assertion that the economy would achieve three per cent growth over the next two years was no longer the key message.

"Indeed, the three per cent forecast was removed from the March RBA Statement, and today's comment on growth was limited to the observation that 'Recent data are consistent with ongoing moderate growth'," she said.

The Australian dollar dropped dramatically after the RBA statement, falling from just above 76 US cents to 75.6 US cents in late afternoon trading - its lowest level since mid-March.

Commonwealth Bank economist Gareth Aird said the RBA remains unlikely to tamper with interest rates as it tries to balance financial stability with sustainable growth.

"The competing forces of below target inflation and soft employment growth against rampant property markets in Sydney and Melbourne mean policy is on hold for the foreseeable future," he said.