In a good piece at the AFR this morning, Chris Joye challenges the RBA’s current approach to monetary policy by comparing it with that of New Zealand:
The RBNZ is actively selling Kiwis in the foreign exchange markets and buying foreign currency while refusing to cut its cash rate beyond the current 2.5 per cent level, which it put in place back in March 2011.
…New Zealand regulators have voiced concerns about the distortions induced by excessively cheap money and recently forced the major Australian banks to hold more capital against their higher risk loans in New Zealand.
“Housing pressures are increasing risk in the financial system,” RBNZ governor Graeme Wheeler says.
…In Australia today you can get a 4.87 per cent variable home loan rate or fix for three years at 4.99 per cent. These outcomes are the deliberate designs of the RBA’s dovish board.
To date financial stability risks have been dismissed, much like they were prior to the GFC both in Australia and in the North Atlantic. Yet it appears the central bank is starting to listen.
On Friday the RBA warned for the first time: “A key risk is that dwelling prices rise more quickly than assumed, spurred by low interest rates … If this were accompanied by a return to increasing household leverage, it would raise concerns from a financial stability perspective.”
The RBA would be wise to listen to its own words.
It is not entirely clear, but does appear that Chris is endorsing macroprudential tools. To clarify I contacted Chris to and asked, his reply was unequivocal:
“I spoke to the RBA directly last week and warned them that I think the cheapest borrowing rates in history are going to inevitably force them to follow the RBNZ’s lead and regulate (with APRA) lending more tightly (eg, through changes to risk-weights against high LVR loans).
There is a fundamental conflict between banks carrying 60-80 times leverage on their home loan books seeking to maximise credit growth and RoEs and the community’s financial stability preferences.”
The lower interest rates/higher macroprudetial guards approach has an irresistible logic to it in the context of a currency wars. Macroprudential is a policy whose time has come.
