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Central bank risk tool gets IMF endorsement amid easy money

[SINGAPORE] In a world of persistently low inflation and slowing economic growth, central banks are finding a useful instrument in their toolboxes to curb financial risk.

Macroprudential measures - such as limiting who gets a mortgage and adjusting banks' reserve requirements - have gained traction with central banks since the global financial crisis, and are proving effective. The targeted tools give policy makers room to hold off from cutting interest rates and fueling risky borrowing.

A 1 percentage-point increase in the loan-to-value ratio - which banks use to assess lending risk - typically moderates an economy's household credit growth by as much as 0.65 percentage point after one year, according to a report this month from the International Monetary Fund.

Of the 134 countries in the study - 36 advanced economies and 98 emerging or developing ones - there was a steady increase in the use of macroprudential tools from 1990 until a plateau in 2012, with about 90 per cent of nations using at least one of those measures by then.

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Central banks are in a bit of a rut, embattled by a decade of persistently low inflation that Federal Reserve chief Jerome Powell described last week as "one of the major challenges of our time." Former Fed chair Janet Yellen is among those citing worries over what tools central banks might have left to navigate the next downturn, especially as interest rates remain relatively low while economic growth is souring globally.

Asia-Pacific economies have taken a lead in using macroprudential measures to curb property price bubbles and household borrowing, and recent examples out of Southeast Asia show how policy makers are leaning harder on the tools.

The Bank of Thailand was able to avoid raising its near-record-low benchmark interest rate until after a more targeted move in November to slow mortgage lending. Citing the risk of runaway property speculation, officials announced a spate of measures to tighten lending, including raising loan-to-value ratio limits, that will take effect in April.

Bank Indonesia has been looking to macroprudential from the opposite position. Having hiked interest rates at the most aggressive pace in the region in 2018, the central bank now faces a tricky position amid currency stability and an abrupt turn by the Fed to a more dovish stance. Hesitant to take the very blunt route of reversing those interest-rate increases, Bank Indonesia officials held their stance last week while raising the loan-to-funding ratio reserve requirement in order to spur bank lending to businesses.

Further south, lending curbs in Australia - particularly to property investors -- helped deflate a housing bubble. Central bank chief Philip Lowe backed tougher regulatory action as tepid inflation ruled out rate hikes; his predecessor Glenn Stevens had resisted calls for macroprudential measures, arguing they'd been scrapped 30 years earlier because the finance industry found ways around them and he saw little point reintroducing failed policies.

While central banks across Asia are staring down higher real interest rates this year that back the case to consider rate cuts, they appear more likely than ever to opt for a different, more trusted stability tool.

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