Bank’s deputy governor backs policy to control inflation

Mr Bean did not address the immediate outlook for the economy or monetary policy in his speech at the Australian National University in Canberra.

Since the financial crisis, there has been much debate about whether central banks should have pre-emptively tightened monetary policy beforehand to slow asset price growth, even if this would have pushed inflation below target. Mr Bean said that his own analysis suggested this was generally undesirable, especially now that central banks and regulators had been given a wider range of tools to stop banks lending irresponsibly, and other financial sector excesses.

If interest rates had been 2 percentage points higher between 2003 and 2006, house prices would have peaked at a level 20 per cent lower than they did, but output would also have been 3 per cent lower and credit in other areas of the economy would still have grown rapidly.

“Clearly, then, the terms of trade for controlling the risks to financial stability through monetary policy alone do not look very favourable. Even substantially higher interest rates over a sustained period would not have prevented the crisis,” Mr Bean said.

Moreover, higher interest rates in one country alone would be unlikely to stem credit flows if other central banks were pursuing much looser policies, he added.

However, it was conceivable that in some circumstances tighter monetary policy may be needed where new macroprudential tools failed to tackle risks effectively.

“There could be occasions when tighter monetary policy is the only way to reach those parts of the financial system beyond the reach of regulation.

“In such cases, if other policies are not available, then ‘leaning against the wind’ may be the only option left,” he said.