Editorial: Dr Bollard appeals to the banks

Alan Bollard has the air of an increasingly desperate Reserve Bank governor. His best attempts to dampen inflationary pressures are being frustrated. Banks, the real estate sector, borrowers and the Government are contriving to undermine him.

But even repeated criticisms of each and every one of them, the last chapter of which was delivered on Wednesday, have been greeted with insouciance. Now, he has gone so far as to seek a little help.

For Dr Bollard, armed only with an appeal to better nature, the main port of call was the banks. They should, he said, look beyond short-term profits and market share, and recognise that the long-term health of the economy was not aided by promoting loans to people who could not afford them. This was tantamount to asking banks to abandon normal business.

Most, however, have benefited hugely from the property boom, and are highly unlikely to place a voluntary cap on easy money.

In a roundabout way, Dr Bollard also warned the banks of the perils of imprudent practice. That there could be a price for the likes of 100 per cent mortgages and encouraging people to put other debt on their mortgage. Just as some paid for getting in over their heads in commercial property in the late 1980s. Yet the banks have reason to be largely indifferent even to this scenario. They have far greater security in a market that may correct but is unlikely to crash dramatically.

Dr Bollard's main problem lies, in fact, with the national psychology underpinning the housing boom. Some people clearly believe that house prices will keep rising, just as in the years leading up to the 1987 crash, some thought share prices headed only one way.

The governor has spent much time trying to dispel this notion. To his frustration, bank largesse and some self-serving real estate statements have led many people to a different, demand-fuelling conclusion.

This has meant the impact of eight rises in the official cash rate since the start of last year has been relatively muted. The repercussions have been more dramatic for business, both in terms of interest rates and a high dollar. In turn, this has led some to question whether Dr Bollard needs a sharper tool in his anti-inflation armoury.

A letter to the editor on this page suggests the capital adequacy ratio that banks must apply to home mortgages could be lifted, thereby constraining the supply of funding for the housing market. This has a surface allure, but would be a drastic departure from international norms. It also ignores the fact that the 50 per cent risk weighting applied to mortgages is appropriate. And that such a device would mark a return to the sort of restrictive practice that once made securing a mortgage difficult.

The aim should be not to prevent people from borrowing but to make them borrow more wisely. As such, adjustments to the official cash rate remain the most appropriate medicine. It is difficult to strike the right balance, and Dr Bollard has been blamed by some, perhaps unfairly, for not lifting the rate more vigorously last year. It is also an instrument that can be blunted, as the governor has discovered, by those who stand to benefit from people unaware of their vulnerability. Sufficiently so as to inspire a level of demand that makes light even of a sharp fall in immigration.

Eventually, however, the hiking of mortgage rates will ease domestic spending, and cause the dollar to fall. Another lift in the official cash rate on December 8 now seems inevitable. Perhaps then people will start to heed Dr Bollard's warning. If not, the correction, when it comes, will be all the sharper.