“But should that turn out not to be the case, there is still scope for further reductions in the policy rate. It is the level of interest rates that matters and they can still move lower.” Rates have been at a record low 1.5 per cent since 2016.

With respect to the level of household debt in Australia, “there is little to form a strong conclusion about how much is too much”, the deputy governor said.

Wednesday’s September quarter GDP was disappointing, coming in at 2.8 per cent year-on-year growth versus expectations for 3.3 per cent, and inviting questions around the health of consumption activity. The data also puts the Reserve Bank’s 3.5 per cent 2018 GDP growth forecast in doubt.

Banks ‘risk amplifying housing downturn’

Dr Debelle also warned that the homogeneity of the Australian banking system could be a weakness in future crises, unlike during the GFC, where it probably helped the banks because counterparties did not have to be so selective with how they managed their exposures across the big four.

“The Australian banks’ similarity is not so obviously beneficial in the current circumstance. Their similar behaviour and similar reaction functions to events such as falling house prices run the risk of amplifying the downturn in the housing market,” he said.

“The crisis very much demonstrated the critical importance of keeping the lending flowing. The lesson is that countries that did that fared better than countries that didn’t. That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy.”

He concluded that “leverage matters”, because it can turn a manageable macro event “into a very hard to manage crisis”.

“But the questions of how much debt is enough and how much is too much remain unresolved.”

He disputed that China “saved” Australia through the GFC years, in that the world’s second-largest economy conducted its own massive stimulus over that period, because that disregards the fact Australian fiscal spending targeting households was highly successful.

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