Monetary and macroprudential policies not effective if pulling in opposite directions

Macroprudential policies aimed at slowing the rate of credit growth are most effective when they are introduced during periods of interest rate tightening, according to the Bank of International Settlements.

The BIS has issued an assessment of macroprudential policies implemented in 12 Asia Pacific countries, including Australia.

According to the paper, most successful instances of macro policies are those where macro policies and interest rate policy are pulling in the same direction - that is, when macro policies are introduced during periods of interest rate tightening.

When interest rate policy and macro policy are pulling in opposite directions, such as where monetary policy is kept loose but macro policies are invoked to deal with the financial stability implications of such loose policy, macro policies are "far less effective".

This is because "economic agents are being told simultaneously to borrow more and borrow less."

Macroprudential policy tools, which include reserve requirements, dynamic provisioning, maximum-loan-to valuation ratios, maximum debt-service-to-income ratios and limits on foreign currency lending, have measurable effects on the growth rate or cyclicality of private sector credit.

In December the Australian Prudential Regulation Authority introduced macro policies aimed at slowing the growth of investment property lending. It told lenders to cap the growth of investment property loans at ten per cent a year and to increase debt serviceability ratios on all mortgages.

The study found that non-interest rate monetary policy tools were used in a complementary way with monetary policy before 2007 but after 2009 macro policies that were applied as interest rates fell had a lack of impact.