The Economic View: Will rates rise faster?
The OECD says Australian interest rates need to start moving up sooner. That puts our Reserve Bank in a tricky predicament.
The release of a report from the Organisation for Economic Co-operation and Decvelopment (the OECD) has highlighted the bind monetary policy finds itself in.
The reports highlights several countries' debt to income level, and the heat in the housing markets of these countries.
Australia is high on its hit list as an economy that is struggling under record levels of debt to income, with a housing market that appears overheated and household debt struggling under that pressure.
The recommendations in the report is to raise rates as early as possible in 2018 as a “tighter policy stance will ease pressures on house prices and will reduce the threat of the build-up of other financial distortions.”
The issue, however, is the fact the report talks about increasing interest rates outside of the inflation mandate of the Reserve Bank. Further to this, it suggests the RBA should raise rates even if inflation isn't materialising as forecasted – this is a huge statement.
The impacts on confidence and growth would be almost immediate if the RBA follows this lead, and any hope the RBA had of wages increases in 2018 would go with it.
The communication needed to make the economy accept changes in monetary policy would have to be flawless – a skill unlikely to be achieved.
Therefore, one would suspect this report may fall on very deaf ears.
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