It what was a somewhat wonkish and largely historical look at the changes and functions of monetary policy, RBA governor Glenn Stevens last night also seemed to question how monetary policy in Australia was working to support demand.
Certainly there were no hints for monetary policy and rate hikes anytime soon. But the governor’s discussion around the impact of leverage on monetary policy decision making and the actions of the central bank point to some concerns at the RBA about the impact of low rates in Australia, and around the world.
Stevens posed this question:
“Suppose a country faces an insufficiency of aggregate demand and below-target inflation, but can generate the demand needed to close the gap and push inflation up to target only by fostering a rise in private sector leverage. How aggressively should the central bank seek to increase demand and return inflation to target?”
NAB’s chief economist markets Ivan Colhoun said the governor was talking about the “somewhat inherent contradiction of the role of monetary policy versus the impact on financial stability.”
That’s the topic Stevens and Australia’s prudential regulator, APRA, are worried about with their concerns focused around Sydney house prices and investor borrowing.
Colhoun said: “One can imagine that the RBA might in some part be considering this question – with part of the answer being that the central bank must to an extent rely on regulatory tools (ie macroprudential policies), but “experience from an earlier era of regulation counsels against putting a lot of faith in such measures.”
Stevens’ lack of comfort with Australia’s current setting wass obvious in his speech:
“Surely another key consideration would be whether leverage has previously been low or high. If it is low, then some increase need not be particularly risky. On the other hand, if leverage is already high, perhaps as a result of an earlier run-up, and if the weakness of demand is in part a result of the private sector being cautious about further extensions of leverage, or even attempting to reduce its leverage, the central bank may face an unenviable set of choices.”