That’s according to an article in the latest Reserve Bank Bulletin by Chris Hunt. He argued that had macroprudential tools been available in 2005, the Reserve Bank would likely have seriously considered using them.
Credit growth looked excessive at the time, asset prices appeared frothy, there was speculative activity apparent in the property investment market in particular, funding risks had increased for banks and household balance sheets looked stretched and vulnerable. There were also growing concerns about a reduction in lending standards as low-LVR lending increased and non-bank lenders became more prominent.
Hunt said even television programmes about property indicated the “irrational exuberance” taking hold in the market. The Reserve Bank became worried about the “expectations dynamic” which saw households bank on future increase in house prices and consuming on the basis of their perceived increase in net wealth.
Hunt said that, in hindsight, monetary policy was too slow in responding to resource inflation pressure and was not effective in leaning against the financial cycle. Macroprudential tools could have been appropriate, if they were available.
“What we can say, with some degree of comfort, is that our indicator framework would have been signalling a concern with the build-up in systemic risk, particularly from 2005 onwards. At the very least the Reserve Bank would have been seriously considering macroprudential intervention around this period.”
The generalised nature of the financial imbalances would have suited an aggregate capital buffer or adjustments to the core-funding ratio, he said. “This approach could have been complemented by sectoral tools, particularly if it was felt that more traction over the cycle was necessary later in the period.”
But the Reserve Bank did consider whether tools should be used to supplement interest rates in 2006, and ruled it out.
In particular, it looked at LVR restrictions, which were already in place in other parts of the world. But they would impinge most directly on lower-income and first-home buyers, a report to the Reserve Bank in February 2006, and could also constrain SME borrowing.
“Long-term enforcement would rest with the Reserve Bank and would be a major challenge (especially for an instrument used infrequently).”
