Tools 'would have worked in last boom'

That’s according to an article in the latest Reserve Bank Bulletin by Chris Hunt.  He argued that had macroprudential tools been available in 2005, the Reserve Bank would likely have seriously considered using them.

Credit growth looked excessive at the time, asset prices appeared frothy, there was speculative activity apparent in the property investment market in particular, funding risks had increased for banks and household balance sheets looked stretched and vulnerable. There were also growing concerns about a reduction in lending standards as low-LVR lending increased and non-bank lenders became more prominent.

Hunt said even television programmes about property indicated the “irrational exuberance” taking hold in the market.  The Reserve Bank became worried about the “expectations dynamic” which saw households bank on future increase in house prices and consuming on the basis of their perceived increase in net wealth.

Hunt said that, in hindsight, monetary policy was too slow in responding to resource inflation pressure and was not effective in leaning against the financial cycle. Macroprudential tools could have been appropriate, if they were available.