Is there hope of a breakout of policy innovation at our central bank? The AFR‘s Alan Mitchell is widely regarded as one of the Bank’s chosen policy mouthpieces and today moots the notion that the RBA will follow Canada and New Zealand in installing new macroprudential tools:
…The Reserve Bank could find itself having to cut interests rates to support demand against the pressure of a strong exchange rate, the strength of the housing market notwithstanding.
Australia could then find itself heading into the place already occupied by Canada and New Zealand, where the monetary authorities have been forced to keep interest rates low despite overheating the property markets.
Both countries have turned to macro-prudential policies, in which the long-standing prudential regulations are adjusted to protect the financial system against the risks of asset price bubbles.
In Canada, a housing boom has been an unwelcome by-product of the low interest rates needed to support growth in the face of fiscal consolidation and a strong exchange rate boosted by safe-haven capital inflows. The Canadian authorities have responded by using prudential regulations to curb the housing boom.
…The International Monetary Fund’s evaluation of Canada’s experience suggests that, after a period of trial and error, the measures have been effective.
In particular the third and fourth rounds in 2011 and 2012 appear to have helped curb the growth of house prices, residential investment and mortgage credit.
The IMF’s analysis of the individual measures suggests that tightening LVR ratios for new mortgages and for refinancing loans has had the greatest impact.
It’s premature to say so but the early evidence in New Zealand’s case is that LVR tightening has also been effective.
Tantalisingly, Glenn Stevens delivers a major annual speech tomorrow and I don’t recall Mitchell arguing for MP before. Fingers crossed that this is a leak.
