Initial Reaction by the Reserve Bank

Initial Reaction by the Reserve Bank

Below is an extract from Consumer Affairs Victoria - Regulating the cost of credit report dated 6 March 2006:

"The Commonwealth’s first, monetarist, reaction to the inflation was to tighten monetary policy. However, it also began the decontrol of bank interest rates and allowed the issue of the country’s first credit cards, which bore borrowing rates well above the controlled rates for other bank loans. Full control of the money supply implied the extension of controls to non-bank intermediaries, but no attempt was made to use the power to regulate awarded to the Reserve Bank in 1974. In 1984, the waning of monetarism and the revival of neoclassical economic theory led to full decontrol of bank interest rates. Financial innovation made it difficult to define, let alone control, monetary aggregates, and the Reserve Bank withdrew its monetary targets a few years later. In effect, the banks and non-banks were put on an equal footing by deregulating the banks, rather than by extending regulation as provided in the 1974 legislation. These changes had the expected effect of allowing the banks to fold their non-bank subsidiaries back into themselves. They also permitted the banks and some building societies to engage in a disastrous adventure in the financing of speculative entrepreneurs, leading to financial breakdown and a recession in the early 1990s. The Commonwealth’s considered reaction to this came in 1998, when prudential controls under the Banking Act were extended to all deposit-taking institutions."