The Reserve Bank of Australia, that Asia-Pacific bastion of hard-money policies, has just joined a dozen other monetary powers in slashing rates as the risk of deflation deepens. The move by Governor Glenn Stevens surprised many and demonstrates how our chaotic times are rewriting the laws of central banking.
Until recently, Stevens and his hawkish ilk acted according to the William McChesney Martin school of money management. Martin is the former Federal Reserve governor who famously said a central banker's job is to "take away the punchbowl just as the party gets going." These days, it's to leave the monetary brew out on the table and steadily strengthen it. This worries purists, who think central bankers acting as enabling bartenders only fuel the next asset bubbles.
The issue Down Under is property. Economist Craig James of Commonwealth Bank of Australia speaks for many when he says that as the RBA cuts rates, the risk is that "people will decide to put more of their money into the housing market, thinking it’s an easy way to make money. We would be concerned about that and too much stimulus is going into the economy." Lower oil prices and a 9 percent drop in the Aussie in 12 months, he says, are stimulus enough. The RBA cut the overnight cash rate anyway -- by 25 basis points to 2.25 percent.
Stevens can avoid adding to Australia's asset imbalances, however. All he needs to do is emulate what his peers in Wellington, New Zealand, and Singapore are doing to minimize housing bubbles without being total economic party poopers.
First, New Zealand, the place that pioneered the kind of inflation targeting that countries such as Japan are now trying. In Wellington, Reserve Bank of New Zealand Governor Graeme Wheeler has been experimenting with strategies to deflate bubbles without killing the economy. Mostly, that's meant so-called macroprudential policies, tools that Paul Krugman and other economists advocated using after the 2008 global crisis. Wheeler ran with the idea beginning in 2013, embracing curbs on leveraged lending such as the “10/80 rule.” This requires that no more than 10 percent of mortgages be underwritten with loan-to-valuation ratios of more than 80 percent. It's a means of controlling excessive household debt that weakens consumer balance sheets and fuels bubbles. Bankers who try to circumvent these regulations lose their licenses.
While this is still a work in progress, New Zealand's performance -- growth of 3.2 percent and inflation of just 0.8 percent -- already speaks for itself. Though house prices rose 6 percent in 2014, that's a far cry from the 15 percent annual house-price inflation that existed just before the global crisis hit. In those days, Wheeler's predecessor Alan Bollard hiked short-term rates to a record high of 8.25 percent. Now, as commodity prices slide and China slows, New Zealand's central bank has room to lower rates (now at 3.5 percent) without fueling the housing markets.
Singapore's handiwork also is worth a look. Since 2013, the tiny city-state has been ramping up efforts to bring down record property prices. Steps have included a cap on debt at 60 percent of a borrower’s income, an increase in real-estate taxes and higher stamp duties on home purchases. Slowly but surely, the curbs have reined in property values. Residential prices are down as much at 8 percent from their mid-2013 peak, while prices in Hong Kong continue to race higher. Granted, Singapore's $298 billion economy is just one-fifth the size of Australia's. Still, Stevens -- and many other central bankers around the globe -- could learn from what Singapore has done.
In today's policy statement, the RBA said that it's "working with other regulators to assess and contain economic risks that may arise from the housing market." Let's hope it means that macroprudential steps will soon be taken in Sydney. As China slows, resource-dependent Australia needs all the inspiration it can get to keep businesses and households in a partying mood.
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