Most people don't understand much about the RBA. Even market analysts miss a lot. One of the reasons is that "RBA speak" can be so contradictory and confusing. The Governor's comments on Friday about a possible dual mandate were a classic example of that, which I will discuss another time. Another example was Dr Luci Ellis's response to a question on whether the RBA uses interest rates to respond directly to asset prices, such as house prices. The most accurate answer to this question would be:
1/ We did not used to, because of the uncertainty swirling around this subject (ie, the global debate);
2/ But we have led people--media--to believe we did in 2002-03 while we have more quietly acknowledged that we did not (only jaw-boning the market);
3/ Post GFC we felt we won the intellectual war (at least we think we did), and so in 2009-10 we normalised the cash rate more quickly than we would otherwise have done because of our concerns about a budding house price boom. This was the first historical example of cash rate changes being directly influenced by house price innovations;
4/ Of course, we really confuse the issue by arguing that while leaning against house prices we do not actually "target" a house price level, and, as Luci has done below, noting that house prices "indirectly" influence the cash rate through their effect on output, employment, and inflation;
5/ Going forward, house prices will definitely have more of an impact on policy, and we now openly embrace and advocate the 'leaning against the wind' school of thought.
Anywho, here is the question and answer..
MICHAEL: Michael from the STAR Credit Union. Luci, if housing prices did get out of control in the future, do you think the Reserve Bank would again use interest rates to try to put downward pressure on prices?
DR ELLIS: I think the premise of your question is that we've used interest rates to make house prices fall in the past, and I think that's probably not really how I'd describe it. You know, obviously what goes on in housing markets and housingcredit is an important part of the transmission mechanism of monetary policy, and we're also very alert to the fact that the state of household balance sheets tells you something about the risk profile of households and how well they're likely to be able to sustain and manage an economic shock. So obviously we look at these things. But interest rates are not used to target prices per se. But, certainly, if housing prices were falling a long way, it wouldn't be happening in isolation. There would be other things going on in the economy as well and, no doubt, those things would also be factoring into the Board's decisions about the appropriate stance of monetary policy given what's happening with growth 10 and inflation.
