Lehman failure escalated crisis: RBA

We’re sorry, this feature is currently unavailable. We’re working to restore it. Please try again later.

Advertisement

This was published 14 years ago

Lehman failure escalated crisis: RBA

The Reserve Bank of Australia (RBA) says the failure of Lehman Brothers in 2008 dramatically escalated the global financial crisis and reduced the impact of changes to monetary policy.

RBA deputy governor Ric Battellino says the collapse of the 158-year-old US investment bank in September last year caused a decline in household and business confidence.

As a result, many nations found that their normal monetary policy transmission mechanism had become less effective, forcing official interest rates to "abnormally low levels, in some cases close to zero".

"The reason why official interest rates have been reduced to such extreme levels is that frictions in markets had made interest rates on loans to households and businesses less responsive to cuts in official rates," Mr Battellino said on Thursday.

Mr Battellino told a Securities and Derivatives Industry Association conference in Sydney that among developed economies, only Australia, New Zealand Denmark and Norway still had official interest rates above one per cent.

"Official interest rates have never been this low in the developed world in the 150-year period for which we have data," he added.

Mr Battellino said the reduced impact of the transmission mechanism meant that household borrowing rates were low, but not at the extremes seen among official interest rates.

Dramatic monetary policy chances were even less effective for corporate borrowers, Mr Battellino said, with interest rates faced by corporations in capital markets "still a little above decade averages" due to the large increase in risk premiums.

Mr Battellino said some central banks had resorted to "unconventional measures" to make up for the limited flow-through of monetary policy changes and sustain the flow of credit in their economies.

He said these measures, such as the purchase of long-term bonds, a process known as quantitative easing, or expanding the range of collateral accepted by the central banks, were starting to show some results.

Advertisement

"So far, their main impact seems to have been on market pricing, which is starting to return to more normal levels," Mr Battellino said.

"As most of these measures were undertaken relatively simultaneously, only their combined effects can be judged."

Also, central banks in the US, UK, Canada, New Zealand and Sweden had all indicated a commitment to keep short-term rates low for a long time in a bid to reduce longer-term interest rates.

Mr Battellino noted criticism surrounding some of these measures, with some arguing they would prove ineffective or, on the other hand, result in higher inflation.

Regarding the argument that these measures would stoke inflation should central banks prove too slow to reverse the various measures, Mr Battellino said policy makers were aware of these risks.

"The high state of awareness that currently exists about the risk of being too slow to reverse recent exceptional measures should limit the probability of such a mistake being made," Mr Battellino said.

Most Viewed in Business

Loading