RBA Deputy Governor Warns About Effects of Low Rates on Economic Fundamentals

Very low global interest rates are likely to persist for some time yet and investors, in their chase for yield, need to be wary of the risks in pushing asset prices too far ahead of economic fundamentals, a top Australian central banker said on Tuesday.

Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe told a conference that while some financial risk-taking was desirable the longer it ran on without complementary pickup in real investment, the greater was the potential for new risks to develop.

“During this period, while we wait for the investment environment to improve, we need to be cognisant of potential risks of asset prices running too far ahead of real activity. This is true in Australia, as it is elsewhere around the world,” he said.

Lowe said a question being discussed internationally and at home was whether the recent increase in house prices in parts of the world, together with pockets of higher borrowing, was generating increased financial and macroeconomic risk.

“Lenders need to ensure that their lending standards remain sound and that they hold the appropriate amount of capital against the risks they face. And investors need to evaluate developments in the broader market, including how their investments might turn out in less benign scenarios,” he said.

“Careful attention to these issues will help ensure that in getting the economic benefits of low interest rates we do not generate unacceptable risks on the financial side.”

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza