The International Monetary Fund’s managing director says that the Reserve Bank can put a ceiling on rising house prices without increasing the official cash rate – by enforcing limits on lending as other centrals banks have done.
"We believe that the central banks have now the macroprudential tools to deal with such developments, and some of them are using them, some of them are increasing or varying the loan-to-income or loan-to-value ratios, for instance, in the housing market, which is one where we have seen clear volatility lately," Christine Lagarde told the ABC
Lagarde also addressed the capital ratio argument that says our big banks should have to hold more capital against money lent out, to avoid any global shocks that could leave our property market and economy exposed. This argument is particularly pronounced with news that the US Federal Reserve is considering rate rises.
"I think that would certainly be the case, that some of the domestic significant banks have to raise their capital ratios," she told the ABC, but added that she did not know much about the specific situation of Australia's big four banks.
Raising capital ratios was a central theme of David Murray’s Financial Services Inquiry. In his interim report, Murray labelled the sharp increase in housing lending a “systematic risk” to the Australian economy, requiring that big banks hold more capital to insure against market corrections.
This is not welcomed by the banks though, who are arguing that stricter capital rules shouldn’t have to apply to them, as Australian banks have shown more resilience in the face of economic downturn than European and US banks.