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”.
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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 over 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.
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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 net interest rate move would be a cut.
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