Papers published today from the Property Market and Financial Stability conference held in August reveal Reserve Bank Governor Glenn Stevens opened the conference with remarks on if central banks should lean on asset bubbles before they get too big and out of control.
Using momentary policy to put downwards pressure on asset bubbles as they grow could affect growth in other sectors, but no action could cause pronounced instability and far greater consequences if left unchecked. Such is the case Australia faces now.
“I would have thought that by this point we have to conclude that simply expecting to clean up after the credit boom is not sufficient anymore; the mess might be so large that monetary policy ends up not being able to do the job when the time comes” remarked Stevens in August when the cash rate was 3.50 per cent.
Since the conference, the cash rate has been reduced to an equal low of 3.00 per cent last recorded at the heights of the GFC. Even at record lows, little life can be seen in Australia’s residential property market as it comes to grips with exuberant household debt levels. Credit growth for residential mortgages continue to trend down to levels exceeding that of any records started 35 years ago. Economists expect the cash rate could reach 2.50 per cent next year. Some countries were forced to introduce quantitative easing (QE) and zero interest rate policy (ZIRP) settings after their large, unchecked housing asset bubbles started to correct.
Stevens continued, “Moreover, if the monetary policy clean-up after the asset price bust involves interest rates low enough to prompt some other sector of the economy to leverage up in order to spur the growth, then the clean-up itself might leave its own toxic consequences.”
With deposit income quickly becoming eroded, investors are turning to higher yielding “safety” equities prompting some to call a “safety bubble.” It appears the Reserve Bank of Australia are only too aware what the consequences are if the cash rate continues to fall to cushion the fallout of our housing asset bubble.
» Opening Remarks – Property Markets and Financial Stability, 20-21 August 2012 – The Reserve Bank of Australia, 11th December 2012.