Don't re­strict lend­ing too much in down­turn, RBA deputy urges banks

The Guardian Australia - - Headlines - Gareth Hutchens

The Re­serve Bank has called on Aus­tralia’s big­gest banks not to re­strict their lend­ing too much dur­ing the cur­rent hous­ing down­turn, warn­ing if bor­row­ers are scared away it will neg­a­tively af­fect the econ­omy.

Guy De­belle, RBA deputy gov­er­nor, says one of the key les­sons pol­i­cy­mak­ers learned from the global fi­nan­cial cri­sis was of the crit­i­cal im­por­tance of keep­ing lend­ing flow­ing, and “that les­son is rel­e­vant to the sit­u­a­tion to­day in Aus­tralia”.

Ac­knowl­edg­ing that global eco­nomic con­di­tions were dif­fer­ent to­day, De­belle said the sim­i­lar­ity in the busi­ness model and re­ac­tive func­tions of Aus­tralia’s ma­jor banks meant there was a risk of them “am­pli­fy­ing” the down­turn in the hous­ing mar­ket.

He said the big four banks – which con­trol more than 80% of Aus­tralia’s mort­gage mar­ket – must be mind­ful of the need to keep al­low­ing bor­row­ers to bor­row.

“The les­son [from the GFC] is that coun­tries that did that fared bet­ter than coun­tries that didn’t,” he said.

“That les­son is rel­e­vant to the sit­u­a­tion to­day in Aus­tralia, where there is a risk that a re­duced ap­petite to lend will overly cur­tail bor­row­ing with con­se­quent ef­fects for the Aus­tralian econ­omy.”

De­belle’s com­ments come de­spite pres­sure from the reg­u­la­tors over the past two years to tighten lend­ing amid con­cern that credit stan­dards were too lax and were fu­elling the hous­ing boom. The sub­se­quent shrink­ing of credit – es­pe­cially to hous­ing in­vestors – is pin­pointed as one of the key rea­sons for the cur­rent fall in prices.

Speak­ing at the Aus­tralian Busi­ness Economists an­nual din­ner in Syd­ney on Thurs­day night, De­belle re­flected more widely on the key les­sons from the GFC, which be­gan decade ago.

“The key les­son that comes from the cri­sis that I will high­light to­day is lever­age re­ally mat­ters,” De­belle told the au­di­ence.

“Lever­age sig­nif­i­cantly mag­ni­fies the ef­fect of any shock that hits the econ­omy. Lever­age might not start the fire, but it will pour petrol on a burn­ing plat­form.

“At the same time, you need to keep the credit flow­ing to pre­vent the econ­omy from seiz­ing up.”

He said the stim­u­lus pack­age in­tro­duced by the Rudd La­bor gov­ern­ment, in re­sponse to the GFC, was “in my view was ab­so­lutely nec­es­sary and was a crit­i­cal fac­tor be­hind Aus­tralia’s good eco­nomic out­comes.”

“While one can ar­gue about the ex­act na­ture of the im­ple­men­ta­tion, the fact that it was de­signed to take

ef­fect quickly was vi­tal in the cir­cum­stances: ‘go hard, go early, go to house­holds’ as [for­mer trea­sury sec­re­tary] Ken Henry put it,” he said.

He also un­der­mined the ar­gu­ment pro­moted by some com­men­ta­tors that Aus­tralia only sur­vived the GFC be­cause of China’s stim­u­lus pack­age.

“China was cer­tainly a ma­jor con­trib­u­tor to Aus­tralia’s re­siliency,” he said. “But it is im­por­tant to re­mem­ber that China’s strong growth at the time was a di­rect con­se­quence of their large fis­cal stim­u­lus. Hence it seems in­con­sis­tent to me to ar­gue that China ‘saved’ Aus­tralia, as a re­sult of its fis­cal stim­u­lus, while si­mul­ta­ne­ously dis­miss­ing the di­rect im­pact of fis­cal stim­u­lus here in Aus­tralia.”

De­belle said other les­sons learned from the GFC were that pol­icy ca­pac­ity mat­ters, both mon­e­tary and fis­cal.

He also in­ti­mated that the Re­serve Bank may have to cut rates again but said if that hap­pened then Aus­tralia would still have some mon­e­tary ca­pac­ity.

“Fis­cal space is re­ally im­por­tant. We still have that in Aus­tralia. It is less clear there is fis­cal ca­pac­ity in some other coun­tries,” he said.

“Mon­e­tary ca­pac­ity mat­ters too. The Re­serve Bank has re­peat­edly said that our ex­pec­ta­tion is that the next move in mon­e­tary pol­icy is more likely up than down though it is some way off. But should that turn out not to be the case, there is still scope for fur­ther re­duc­tions in the pol­icy rate. It is the level of in­ter­est rates that mat­ters and they can still move lower.”

His com­ments come a day af­ter data showed Aus­tralia’s econ­omy had slowed from an an­nual rate of 3.4% to 2.8%.

The slow down caught the mar­ket off guard, and prompted some economists to warn that the econ­omy’s growth rate would strug­gle to get to 3.5% next year.

Shane Oliver, the chief econ­o­mist of AMP Cap­i­tal, said he now be­lieved the RBA’s next in­ter­est rate move would be a cut.

Pho­to­graph: Joel Car­rett/AAP

The big four banks could am­plify a down­turn if they don’t keep credit flow­ing, RBA deputyGuy De­belle says.

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