Transcript of Question & Answer Session Remarks to the Melbourne Economic Forum on Financial System Reform and the Monetary System


One of the lessons, I would have thought, of the financial crisis is you don't play dead with interest rates or an asset price bubble. I note that a couple of weeks ago, last month, you said that macroprudential tools were a fad, an international fad. I saw yesterday that you're considering using them. Why have you changed your mind?

Mr Stevens

- - - I think, well, when Peter said monetary policy can't solve all problems, let me tell you there's no one more conscious of that than me. But, I think the situation we face is: the things that are responsive to interest rates in the domestic economy tell us that they're low and that the sorts of things you'd expect to occur generally are. Since interest rates are also a relative price, the exchange rate is high because other people's rates are very low and indeed the whole universe of assets returns in this country, the cash rate, is really a trivial part of this, every asset here. From the buildings that are nearby, to us here, and right around the country, various physical assets and financial assets all look attractive. And so you have capital flows seeking that and that raises the question that Peter poses of: what's our attitude to capital inflow? Generally our country's attitude to capital inflow as that we like it. There wouldn't be a business person in Australia who'd say otherwise, but that's the same thing as saying we actually want the exchange rate to be high. So it's a complex situation that we face and there are no magic bullets in my armoury to make things seem sweet. On the macroprudential, everybody's very excited about yesterday's comments, but basically there is one area that I think is of concern right now and that is that investor finance is growing at double-digit rates. It's nearly half the flow of new approvals. A lot of this is interest-only lending in an environment of rising house prices, especially in Sydney and Melbourne. I think it's perfectly sound and sensible to ask ourselves whether there are tools that might, at least, lean on that a bit. I see not much downside of doing so, the worst that could happen is it doesn't have that big an effect, but if it had some, and that helped us to square in some small way all the conflicting things that we have going on, that is worth a try. I'm not naïve enough to believe that these kind of tools are, you know, any kind of panacea or a permanent solution. I'm old enough to remember the lessons of regulation in the past. But that doesn't mean you shouldn't use them for a period, if at the margin they might be helpful, and that's the kind of thing that's in my mind, nothing more. I don't think that's any kind of change of tune really. I've always said I have a certain scepticism about macroprudential tools as a panacea, but I remain open to using them if it seems sensible to do so, and that's the kind of thing we have in mind right now.