In his testimony before parliament in August, Dr Philip Lowe had echoed RBA’s projection of 2-3 per cent GDP growth in the economy this year and next, due to the stronger commodity prices, higher liquefied natural gas exports, and an expected ending of the mining investment slowdown.

The governor has always emphasized on the need to preserve financial stability at the back of what he noted during his first year of role at RBA. The governor has particularly been concerned about rising household debt and flat wages growth, and the lower interest rates that might cause the situation to become “dangerous” for Australian Economy. He has warned against a new breed of risk considering the record levels of debt and the associated property boom. Due to the high levels of debt and housing prices, relative to incomes, some households might even respond to a future shock to income or housing prices by deciding that they have borrowed too much. The proportion of households with less than one month's savings made up more than 30 per cent of loans.


Housing Equity Injection (Source: ABS; Australian Treasury; Core Logic; RBA)
 
Additionally, Dr Lowe had pointed out earlier that the sluggishness in wage growth is not a temporary effect and rather weighed down the household spending, expectations of future income growth and the time taken to pay off debt. On the other hand, the labor market has been generating sufficient jobs to keep the unemployment rate broadly steady. Thus, what has been concerning RBA is that monetary stimulus is having relatively little effect on inflation, but it is likely to keep pushing up asset prices by encouraging borrowing. The Investment bank Citi had earlier this year released a research note predicting a 7 per cent fall in house prices over the next 18 months. In response to Dr Lowe's speech the bank's analysts said it was "concerning" to see RBA's data that households tend to have "very large" saving buffers or "very marginal buffers".

Some prominent economists had been expecting a cut from the RBA in the second half of this year with changes in the housing construction boom. However, it will be a key thing for the governor to strike a balance and exercise an appropriate judgement when it comes to housing and interest rates’ scenario. Considering the position, Dr Lowe has in fact indicated that the current market pricing implies a greater probability of a rate rise, than a rate reduction; and the next move in interest rates is a long way out. In a recent speech at Perth, the governor has talked about the increased borrowing that has made households less inclined to let consumption growth run ahead of growth in incomes for too long. While Dr Lowe has been optimistic about economy, the changes to interest rates will only be made until stronger signs of economic improvement are witnessed.

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