Dollar up as rates look steady
Reserve Bank governor Glenn Stevens has told homeowners to expect stable interest rates but warned them against hoping for a big increase in housing prices.
As financial markets indicated they believed the Reserve had finished with interest rate cuts, Mr Stevens signalled encouraging signs for the economy yesterday.
The bank left official rates on hold this week at an equal 64-year low of 2.5 per cent but that was before new GDP, retail and trade figures all pointed to upswings.
Since rates dropped to 2.5 per cent in August, house prices, particularly in Sydney, have climbed and there has been a strong lift in home building approvals.
Mr Stevens said there were good signs low interest rates were boosting sectors outside mining.
But he cautioned that house prices might not keep rising.
"Prices don't just rise, they can fall," he said. "They have fallen and people need to be careful they don't take on too much leverage."
There have been fears of a debt-fuelled property price bubble on the back of the low rates.
Mr Stevens said though he did not belong to the "club" that thought Australians were carrying too much debt, taking on extra debt did pose risks.
"Household debt is pretty high now and we'd, surely, be asking for trouble if we saw a big step up from where we are," he said.
Homeowners expecting a further rate cut were likely to be disappointed with the economy improving overall.
Though unemployment was likely to edge up, it would probably peak this year.
Mr Stevens said keeping interest rates stable was "probably helpful to people".
His comments had an immediate impact, with the Australian dollar pushing over US91¢ on expectations the Reserve would look at an interest rate rise sooner rather than later.
But Merrill Lynch senior economist Saul Eslake said there were still substantial down sides for the country. Investment in mining was declining and was not yet being offset by investment in other sectors.
"We expect that the RBA will need to keep rates accommodative to support the rebalancing of economic growth through the year," Mr Eslake said.
"There is a possibility policy will need to be loosened further as downside risks intensify."
