Via the AFR’s Patrick Commins:
The RBA still has the potential to cut rates further, but by this stage that just looks like a case of indulging in “the hair of the dog that bit you”.
I would argue a more effective and targeted way to support the housing market right now would be to remove the requirement that banks assess a potential borrower’s capacity to repay using an interest rate of at least 7 per cent.
And that won’t do the same thing? Cripes. Both will make credit easier. One via the price, the other by availability.
But that’s where the similarities end. The thing is, monetary policy is not just about house prices. It is about the entire economy. MB argued for macroprudential from 2011 because it was going to enable the RBA to cut rates without misallocating credit and that, in turn, would sink the Australian dollar, triggering a growth spurt in the 40% of the economy that is tradable.
That’s what we need more than anything else. House price inflation as a growth driver is over. Households are too indebted. The mining boom is also over because China is too indebted. Today’s little boom is nothing more than a fortuitous supply-side squeeze that will pass in due course.
In these circumstances, to grow at all Australia needs a lower real exchange rate and the easiest and fastest way to get it is lowering the cash rate as far as it can go.
So long as APRA keeps the brakes on there is no downside to it. There’s not enough ammunition left in the cash rate to matter in any external shock. And asking APRA to loosen after its just been scorched by years of criminal laxity is not in anybody’s interests. The quality of bank lending will fall more unsustainable debt rise. Moreover, if APRA eases and banks lend then the Australian dollar will very likely rise and deliver lower inflation, defeating the purpose.
We’ve made monetary blunder after blunder since 2011. Let’s not make another one.