Banks’ pack behaviour could drive housing lower: RBA

Reserve Bank of Australia deputy governor Guy Debelle has warned that the Australian banking industry's habit of acting as a pack could exacerbate the housing slowdown.

In a speech to mark 10 years since the begining of the global financial crisis, Dr Debelle said there were a number of unresolved questions from the events of the past decade as well as lessons learned.

Reserve Bank deputy governor Guy DebelleCredit:Alex Ellinghausen / Fairfax Media

"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," he said.

The recent housing market fall has been partly attributed to tougher prudential rules on the banks but also a pull back in credit appetite from lenders in response to the royal commission and other factors.

The most recent national accounts suggested consumers were lacking in the confidence to spend, producing a weaker than expected result and sparking speculation the Reserve Bank's next move on interest rates could be down rather than up.

Dr Debelle said it was important to note that monetary and fiscal policy had both assisted Australia in the GFC and there was scope for both to be deployed in the event of another crisis.

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.

"Policy capacity matters, both monetary and fiscal. Fiscal space is really important. We still have that in Australia. It is less clear there is fiscal capacity in some other countries. Monetary capacity matters too," he said.

"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."

Dr Debelle said his worst memory was from the early hours of October 11, 2008 when the bank's New York team said the market for American Treasury bonds "had effectively seized up".

"It is worth recounting this, just to recall how dislocative and disruptive these developments were," he said in the speech to the Australian Business Economists annual dinner in Sydney.

Dr Debelle said a mixture of well-delivered policy and good luck delivered Australia through the crisis better than other countries.

"Policy actions made an important contribution too. Monetary policy was eased rapidly. The Australian banking system was much less affected by the problems bedevilling banking systems in other countries (partly through good luck).

"Fiscal stimulus in Australia, in my view, was absolutely necessary and was a critical factor behind Australia’s good economic outcomes," he said.

"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."

Dr Debelle said one of the biggest unanswered questions from the GFC was what level of leverage is "dangerously excessive for governments, households, banks and corporates".

"While acknowledging that household debt is higher in Australia than many other countries, there is little to form a strong conclusion about how much is too much," he said.

"How much debt is enough and how to best manage the risks are two of the large questions remaining unanswered, 10 years after the GFC. Leverage can turn a manageable macroeconomic event into a very hard to manage crisis."

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