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Central banks should move early on bubbles: RBA
February 9, 2010 - 4:34PM
Central banks may need to become more pro-active in dealing with dangerous asset bubbles before they become destabilising to the financial system, the Reserve Bank said today. In a paper co-authored by RBA Governor Glenn Stevens, the central bank argued 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, Mr 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 closed-door conference in his speech, a copy of which was released to the media.
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," Stevens said.
He was addressing a meeting attended by top officials from the European Central Bank, the U.S. Federal Reserve, the Bank of Japan and other Asian central banks. First mover Australia was the first among industrialised nations last year to begin lifting interest rates from emergency lows, in part wary of fuelling another 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. 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.
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."
February 9, 2010 - 4:34PM
Central banks may need to become more pro-active in dealing with dangerous asset bubbles before they become destabilising to the financial system, the Reserve Bank said today. In a paper co-authored by RBA Governor Glenn Stevens, the central bank argued 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, Mr 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 closed-door conference in his speech, a copy of which was released to the media.
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," Stevens said.
He was addressing a meeting attended by top officials from the European Central Bank, the U.S. Federal Reserve, the Bank of Japan and other Asian central banks. First mover Australia was the first among industrialised nations last year to begin lifting interest rates from emergency lows, in part wary of fuelling another 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. 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.
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."
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This post has been edited by Bullshark: 09 February 2010 - 06:05 AM
