Reserve says proactive policy needed to burst bubbles
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The RBA governor Glenn Stevens says central banks need to curb booms by "not keeping interest rates unusually low" (AAP : Dean Lewins)
Central banks may need to become more proactive in dealing with dangerous asset bubbles before they become destabilising to the financial system, according the RBA.
In a paper co-authored by Reserve Bank governor Glenn Stevens, the central bank argues that keeping official interest rates too low for too long could inadvertently fuel imbalances that would lead to asset price bubbles.
At a conference to mark the Reserve Bank's 50th anniversary, attended by central bankers from around the world, Stevens said central banks had to be wary of waiting too long during a boom cycle to curb imbalances.
"It also amounts to an argument to avoid having the boom get to that point and to err on the side, much earlier in the process, of not keeping interest rates unusually low," Mr Stevens told the conference. The conference was closed to the media, but copies of the speeches were released.
The problem was not solely asset prices, but the imbalances reflected in a combination of rapidly rising asset prices and credit and falling lending standards, he argued.
"It is unlikely to be credible for central banks not to move, in the next decade, at least somewhat in the 'responsive' direction," Mr Stevens said.
He was addressing a meeting attended by top officials from the European Central Bank, the US Federal Reserve, the Bank of Japan and other Asian central banks.
Australia was the first among industrialised nations last year to begin lifting interest rates from emergency lows, in part wary of fuelling a housing bubble.
The RBA has long challenged the prevailing view among central banks that they should not target asset prices and rather mop up the damage from bubbles afterward.
In 2002 and 2003, it nudged up interest rates and was effective in talking down a frothy housing market.
The US Federal Reserve's policy of keeping official rates low after the last downturn has been widely blamed for fuelling the US housing debacle that led to the global financial crisis.
The Fed took the view that since it was hard to identify asset bubbles in the making, it was best to let asset markets play out and "clean up" the fall-out after the boom ended.
But as major central banks have found in the wake of the crisis, cleaning up afterwards is difficult when interest rates have been slashed close to zero.
One argument against interfering with asset prices is based on the belief that it is too hard to judge excessive growth, but the RBA chief said policymakers routinely faced these kinds of difficulties in judging the risks to inflation and growth.
Mr Stevens and his co-authors suggested that there are a few other questions and challenges that may confront central bankers post-crisis.
"Is the recent set of events a one-off response to a once in a life-time event, or will fiscal policy authorities, perhaps emboldened by this experience, continue more active attempts at stabilisation policy in the future?" they asked.
"Second, and perhaps more pressing over the next few years, will governments be able to match their expansionary fiscal activism with a corresponding degree of discipline to restore budgets to sustainability?
"Third, if governments do respond to the debt trends by fiscal consolidation at some point, this may well inhibit growth for a time."
Bank for International Settlements head Jaime Caruana, speaking at the same event, echoed the point that central banks need to play a greater role in ensuring financial stability to help prevent future crises.
According to a copy of his speech, Caruana noted that debt-fuelled asset bubbles can feed off cheap money.
"In general, prudential policies do not suffice to maintain financial stability," he said.
"This being the case, regulation would be overburdened without some help from monetary policy."
- Reuters/AAP
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