It may be a contender for the most boring buzzword in history, but `macroprudential’ is the term of the moment in economic an political circles.
So what does it mean?
Essentially, it’s all about the Reserve Bank of Australia’s search for a way to rein in the booming housing market before things get out of control.
The RBA has expressed concern lately about the rise in house prices, especially in Sydney, and the possibility that investors are inflating the market.
Economists, however, will argue that the RBA doesn’t much care about house prices per se, its concern is the stability of the financial system.
Put another way, it’s the job of the RBA, and the Australian Prudential Regulatory Authority, to ensure that banks don’t get involved in too much high-risk lending, say the kind that brought on the global financial crisis.
Prudential regulation already exists, such as capital requirements that restrict how much banks can lend.
They are, effectively, a way of saving banks from themselves.
What that RBA is considering now is using those same rules to save the economy from the banks. Hence the term macroprudential, or macropru for those who can’t manage more than three syllables.
Economists don’t much like it and Reserve Bank of Australia governor Glenn Stevens this week said he doesn’t much like it either.
That’s because the RBA’s been down this road before: the central bank attempted to keep control of the financial system during the 1960s and 70s by, among other things, restricting how much banks could lend.
It didn’t work all that well, as anyone who lived through the recessions of the 70s and 80s can attest, and for the past three decades the RBA’s preference has been to keep things under control by raising and lowering interest rates as necessary.
It also hasn’t worked that well in New Zealand, where restrictions on loan-to-valuation ratios have effectively forced many would-be first home buyers out of the market.
Ideally, the RBA could prevent the current housing boom from becoming a dangerous bubble by simply lifting the cash rate from its record low.
But, AMP chief economist Dr Shane Oliver says, doing so right now risks pushing the Australian dollar up, which would hurt a fragile economy adjusting to the slowdown in the mining sector.
“The Reserve Bank is understandably sceptical of this approach but it’s between a rock and a hard place,” he said.
“I guess they feel that macroprudential tools aren’t a preferred approach but at this stage it’s better than raising interest rates.”
He puts the chances of the RBA going down the `macropru’ path before the end of 2014 at more than 50 per cent, unless the housing market starts to cool.
The most likely option, he says, would be lifting the amount of capital banks are required to hold against their loans.
Alternatively, he says, the RBA could force banks to assess borrowers’ ability to make repayments at significantly higher rates of interest than currently apply before approving a loan.
But HSBC Australia chief economist Bloxham says the RBA could avoid `macropru’ altogether by simply talking up the prospect of interest rate rises in 2015.
“That has been quite effective in the past and I think that would be, in and of itself, enough to see the housing market cool,” he said.