Canada's Housing Bubble

Mar 30, 2010 David Uren The Australian

With interest rates heading higher, Reserve Bank governor Glenn Stevens yesterday took to morning television to explain the central bank's actions and to warn against speculating on continuing rising house prices.

Mr Stevens appeared on the Seven Network's Sunrise program, giving an unprecedented interview to presenter David Koch, as part of an effort to improve the public's understanding of the RBA.

Mr Stevens said the property market was what people should be most worried about at present.

"I think it is a mistake to assume that a riskless, easy guaranteed way to prosperity is just to be leveraged up into property. It isn't going to be that easy," he said.

The RBA is concerned that momentum may be building in the property market, driving prices much higher. Mr Stevens's comments are consistent with the approach of his predecessor, Ian Macfarlane, who used forums to try to cool property markets.

He repeated his warning that rates had further to rise from the emergency levels of 2008-09. "Once the emergency has passed and things gradually look more normal, it's not wise to leave interest rates right down at rock bottom any longer than you need . . . you shouldn't assume they'll stay that low because that assumption will prove to be unfortunate."

Mr Stevens's decision to give the interview was part of the bank's 50th anniversary celebrations, but it also follows efforts by central bankers in other countries to improve their public image after the global financial crisis.

US Federal Reserve chairman Ben Bernanke gave an interview with 60 Minutes last year, which included a similar tour of the boardroom to the one shown on Sunrise yesterday morning.

When the RBA was last increasing interest rates in early 2008, Mr Stevens came under savage attack in the popular media and was seen by Wayne Swan to have presented his case for the increases poorly.

Mr Stevens defended the RBA's target of keeping inflation between 2 and 3 per cent and rejected International Monetary Fund suggestions that the band be raised to 4 per cent.

"The lesson of history is that if you allow a bit more inflation now, then pretty soon it is a bit more and a bit more after that."

He said this was how Australia went from having inflation of between 2 and 3 per cent in the 1950s and 60s to reach a peak of about 18 per cent. He said from 1970 to 1990, inflation averaged 8 per cent and the value of a dollar was eroded to just 21c.

The interview included personal reflections, such as his confession that maths was not his strong suit at school and that having spent 30 years working for the one institution, "I am Sydney's most boring person, really".

He told Koch his wife was collecting bank notes with his signature on them, adding "there are too many for her to get them all".

His best decision as governor was cutting interest rates by a full percentage point at the peak of the financial crisis in October 2008 -- twice as much as the financial markets were expecting.