Daily Commentary BY THE CURVE TEAM –

Macro-prudential Tools Available

24th of March, 2021

With the RBA’s clear forward guidance on interest rates, macro-prudential adjustments may be required if the RBA are to hold firm on their expectations.

Speculation of tighter lending restrictions by the end of the year is rife. Ultra-low interest rates has led to predictions of drastic rises in house prices over the next year and beyond.

House prices are not a core component of RBA objectives, should they rise to lofty levels the RBA will be weary of the potential negative consequences of prices falling from peaks. The RBA have made clear though that they expect the cash rate to be on hold until at least 2024, which they can back track from but it would reduce their credibility.

Implementing macro-prudential restrictions seems the most viable way for the RBA to sustain lower rates until employment and inflation recover but not let house prices get too frothy. New Zealand has already pulled the trigger, with tax breaks removed, more stringent requirements for investors and more support for first home buyers. Median house prices are nearly 20% higher over the year.

There was more action in US treasuries overnight as US Treasury Secretary Janet Yellen and Federal Reserve Chairman Powell appeared before Congress. They made clear that more was still needed for the economy to complete its recovery.

This was in spite of improved forecasts and a much more optimistic outlook. US Treasuries dropped over 5 points following the address.

In Europe, a third wave of covid cases has sent multiple countries into stricter lockdowns. Germany, France and Italy have all lengthened their lockdowns, which will impact global demand.

Josh Stewart

Associate - Money Markets