Property and assets a factor in monetary policy
(12 December 2012 – Australia) While keeping inflation in check, Reserve Bank of Australia (RBA) governor Glenn Stevens told a conference on property markets and financial instability that it was crucial to get an economy’s underlying monetary policy framework right to achieve stability and growth.
Although the conference was back in August, the remarks were not made public until Tuesday.
Stevens told the conference that central banks have to take into account the effect of their policy measures on the prices of assets such as property and shares.
'But I would also say that establishing a credible and enduring monetary policy framework around controlling consumer price inflation, though critical, is not enough,' he said.
'Financial stability and monetary policy are related - the relationship is not simple, it is complex, but you certainly cannot divorce the two."
The RBA had learned the lesson that asset prices, and property prices in particular, matter because property holdings tend to be leveraged - bought with borrowed money.
'It is property that is being used as collateral for significant lending by financial institutions that makes property prices so important,' Stevens said.
He also warned that a policy of low interest rates used in the post-GFC cleanup might bring 'its own toxic consequences'.
Stevens told the conference that central banks have to take into account the effect of their policy measures on the prices of assets such as property and shares.
'But I would also say that establishing a credible and enduring monetary policy framework around controlling consumer price inflation, though critical, is not enough,' he said.
'Financial stability and monetary policy are related - the relationship is not simple, it is complex, but you certainly cannot divorce the two."
The RBA had learned the lesson that asset prices, and property prices in particular, matter because property holdings tend to be leveraged - bought with borrowed money.
'It is property that is being used as collateral for significant lending by financial institutions that makes property prices so important,' Stevens said.
He also warned that a policy of low interest rates used in the post-GFC cleanup might bring 'its own toxic consequences'.
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