Do Synchronised Credit Growth and House Price Growth Booms Impact the Monetary Policy Reaction to Inflationary Pressures?

Abstract

To what extent do synchronised credit growth and house price growth boom episodes impact the policy response to inflationary pressures? We establish that GDP growth tends to have low-frequency cycles compared to the financial cycles. Real and financial cycles have become more synchronised post-2000. Evidence shows that household credit growth contributed to the prolonged duration of aggregate credit growth during the recent credit growth boom whereas credit to companies contributed more to the amplitude of the boom. The duration and amplitude of nominal house price growth also played a significant role in the recent credit growth boom. The mortgage advances credit growth cycle tends to be long and severe. Mortgage credit growth plays a significant role in propagating the house price growth boom episodes. Thus, mortgage credit growth is an important conduit through which the house price growth boom episode shocks are transmitted to credit growth and GDP growth. Evidence shows that the repo rate responds differently during periods when the house price growth and credit growth boom episodes are synchronised compared to those of non-boom periods. Synchronised boom episodes propagate inflationary pressures and result in pronounced increases in the repo rate. The concurrence of house price growth and credit growth boom periods amplifies the repo rate responses to positive inflation shocks. The synchronised non-boom episodes have little effect on the amplification of the policy rate responses to positive inflation when inflation is above 6 per cent. Asset price growth and credit growth boom and non-boom episodes spill over into the real economy, and have an impact on inflationary pressures and the rate at which the policy rate responds.