Analysis: RBA QE Unlikely If House Prices Continue Rising

• Published on
• 22 Nov 2019, 12:00 AM

By Sophia Rodrigues

There is a  lot of hype around Reserve Bank of Australia governor Philip Lowe’s speech on Unconventional Monetary Policy next week but markets should prepare for a disappointment because it is unlikely Lowe would signal Quantative Easing is imminent or anytime soon.

In fact, if you have a view that house prices will continue to rise next year, you shouldn’t expect a QE next year.

Rising house prices means the RBA’s three rate cuts so far this year is working. It means the economy would benefit from increased consumption from rising wealth effect, rise in spending from housing turnover and rise in dwelling construction.

Just recently, the RBA confessed it underestimated the impact of housing market activity on the economy.

“The extent and breadth of the spillovers from the housing downturn – particularly for consumption, household income, dwelling investment and inflation – had been an important driver of these outcomes. These spillovers had mostly been identified at the time as downside risks to the forecasts, but their extent had been considerably larger than expected,” the RBA said in the minutes of the November board meeting.

Maybe the impact on the economy during the upswing may not be the same as the downswing but there is no denying that rising house prices is stimulatory for the economy. And there is a good likelihood that rising house prices will lead to increase in housing market activity, including housing construction.

It is difficult to imagine the RBA would do QE when house prices are rising because of two reasons.

--Rising house prices mean the economy is doing reasonably well, and will get further boost.

--Any QE would further ignite house prices. The RBA would only consider it if its view is that house prices need to rise further to have more impact on the economy. But at that point it would also have to take financial stability under consideration.

SERIOUS DOWNTURN OR RISING EXCHANGE RATE

Any QE in Australia would only happen if there is a risk of a serious downturn, but because a downturn and boom in housing market don’t go together, it is difficult to think there would be QE in the present of rising housing prices.

The RBA would also consider QE if there is upward pressure on the exchange rate, if it is certain that it could dampen that pressure by resorting to some form of QE. But before doing that it might exhaust conventional policy options like intervention in the foreign-exchange market, and use of forex swaps.

A more refined forward guidance aimed at the exchange rate market, could be an unconventional monetary policy option too.

--Contact: sophia@centralbankintel.com