Pascometer burns red on macroprudential

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I missed this yesterday, the cause of macroprudential took another serious blow after it was backed by the Pascometer:

…if the strong dollar is restraining economic growth, it becomes much harder for the RBA to lift rates if they only reason is the perception that housing prices are rising too far, too fast.

Which in turn is why I suspect, contrary to many commentators, that the RBA has not given up on trying methods other than its blunt and brutal monetary policy to temper housing speculation.

The RBA heavyweights have made it clear that they don’t much like macroprudential because its most common form – tightening the loan-to-valuation ratio – particularly disadvantages first home buyers. Macroprudential is “not a silver bullet” and would only be “an adjunct” to their usual interest rate club, but they certainly haven’t ruled it out, as was made clear in this exchange during last month’s testimony before the House of Representatives economics committee.

…Since then, the Reserve Bank of New Zealand has claimed success in using macroprudential policy to cool its overheating housing market by restricting the percentage of high LVR loans banks can make. Since October, the percentage of high LVR loans in kiwi banks’ portfolios had fallen to 7.8 per cent – about half what the RBNZ had expected.

In one of those little coincidences that are sometimes interesting, an RBNZ paper on macroprudential policy options in March last year was prepared by Larmorna Rogers – an RBA officer then on secondment and now back in Martin Place.

However much the RBA might be wary of the Law of Unintended Consequences being at work when policy creates distortions, consider a scenario where the Australian dollar is stubbornly strong, making it harder for our economy to handle its transition from reliance on resources construction, when higher interest rates would further push up the Aussie, but when housing prices are continuing to rise, fuelled by low interest rates. In such a situation, would the RBA really want to land a double whack on the economy by lifting rates without at least trying a humble lead bullet?

The logic of macroprudential policy is seamless and, who knows, if the Pascometer can see it, perhaps so can the snails at the RBA. By the time it arrives it will be three years and one huge Sydney and Melbourne bubble too late and will therefore be much more damaging than it needed to be.

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For it to be strong enough to lower the dollar it will also need to lower interest rates. That means it will have to at minimum stall house prices and give they’re already at nose-bleed levels probably force them to fall.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.