RBA leaves rates steady in April, takes aim at risky borrowers

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Australia’s central bank has delivered a strong warning on risky lending to house buyers amid the continued rise in domestic property prices and struck a more downbeat tone on the state of the labour market as it kept benchmark interest rates on hold on Tuesday.

The Reserve Bank of Australia kept the cash rate steady at 1.5 per cent, as expected by economists.

The RBA warned that “some indicators of conditions in the labour market have softened recently”, adopting a slightly more downbeat tone than March and previous months where it had described labour market indicators as “mixed”. While the bank again said its forward-looking indicators still pointed to growth in employment over the period ahead, it added that “Wage growth remains slow.”

The central bank also delivered a more pointed warning about the Australian property market, particularly the major cities of Sydney and Melbourne that are still seeing double-digit annual price gains.

In an entirely new paragraph, the RBA said:

Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.

As far as wording from the Australian central bank goes, the above is from the stronger end of the spectrum. That last line, distilled into two words, basically says: ‘Stop it’.

Regulators are cracking down on interest only loans in an effort to cool rising house prices, and last week flagged the introduction of a new suite of macroprudential rules targeting risky lending, while commercial banks have also raised interest rates for interest only borrowers.

The Australian dollar, which was trading flat ahead of the decision, tumbled 0.3 per cent to $0.7581.

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