Here we go again
The Reserve Bank of Australia kept the cash rate on hold today at 0.10 per cent.
According to most of what I've been reading, almost everyone in the media and commentary game appears set on the idea of macroprudential policies being reintroduced to restrict credit growth.
The idea will mainly be to limit borrowing for housing - ostensibly to reduce systemic risk - but such restrictions have a tendency to impact small business owners and other borrowers too.
At the end of the day it doesn't matter what the price of credit is if borrowers can't access it.
And, just like last time, the result will be a relative weakening of aggregate demand, quite likely requiring further monetary easing later.
Curb your lending
The prevailing viewpoint seems to be that some borrowers need to be pre-emptively protected from taking on risk - nobody must be allowed to fail.
But the people that are to be protected (namely lower income earners, first homebuyers, single income applicants, the young, and essentially those without wealthy parents) will also be those who miss out.
We saw the introduction of LTI caps in the United Kingdom some years ago, which reduced the number of first homebuyers in the market, but didn't seem to achieve much else worthwhile.
Lending instead switched up to higher income earners, joint income applicants, and equity-rich upgraders.
As I've argued here previously, unless there's clear evidence of pro-cyclical loosening macroprudential (MP) measures should be set-and-forget.
Applying MP fine-tuning as an independent arm of stabilisation policy complicates both the role and accountability of the Reserve Bank (which has been having enough trouble meeting its targets as it is).
Since we're all marginal borrowers at some point, over-zealous MP chokes off the credit supply to the economy - small business owners also use equity from housing - and exacerbates wealth inequality by shutting out low income earning homebuyers at lower price points.
RBA statement
The RBA statement today appeared to reiterate that credit growth may be restricted soon.
It’s not clear how this would help, and will only serve to choke off the economic recovery before it's even taken hold.
The Australian economy contracted by up to 5 per cent in the third quarter of this year, and with housing construction also likely to become a headwind next year it may not be too long before negative interest rates are being contemplated.
The RBA has previously stated that negative interest rates are extraordinarily unlikely - but they spent years saying the next move in interest rates would be up, and that didn't happen either.
Here we go again…
