Nonetheless, regardless of the form of institutional organisation, it seems inevitable that monetary policy and regulatory activities will increasingly approach each other. Can monetary policy prevent a credit-driven property boom? One issue that has been discussed for a fairly lengthy period of time, and which has gained fresh impetus from the financial crisis, concerns the extent towards which monetary policy should be used to attempt to counteract a rapid increase of property prices and credit  12  BIS Review 68/2010  volumes. This focus on the property market in particular exists because problems there often have greater effects on the financial system and the economy in general than problems on, for example, the stock market. Allow me to use the property market as an illustration here too. The dynamic of a creditdriven increase on the property market can be described as follows. When the price of an asset starts to rise, it becomes possible to borrow against that asset for a higher amount. This frees up money to buy more of the asset, but also for consumption. The latter implies that rising property prices may lead to a credit-driven consumption boom. When the price increases, there also arises a tendency to regard the asset as being less risky, meaning that the credit risk premium decreases and the loan-to-value ratio is allowed to increase. In the lending rate equation, this implies a decrease in the interest rate margin. Cheaper credit feeds further price increases, which, in turn, feed further credit expansion, and so on.
It should be pointed out that the reason that a central bank may wish to lean against the wind does not have to be because it only wishes to safeguard financial stability. That may be the case, but it may also be a purely monetary policy decision. The bank may simply wish to attempt to avoid severe fluctuations in the real economy and inflation, even if these are not deemed to be associated with financial stability problems. Leaning against the wind is not a problem-free strategy. Three primary counterarguments have been put forth. 7 Firstly, the imbalance must be identified at a sufficiently early stage. Attempting to rectify the imbalance too late may be problematic as monetary policy acts with a time lag. If property prices fall steeply immediately following an increase of the policy rate by the central bank, the delayed effects of the interest rate increase will reinforce the negative effects on the economy of the falling property prices. Of course, one must also be sufficiently certain that an imbalance really is building up. If the upturn is being caused by fundamental factors, a higher interest rate would hinder growth unnecessarily. Secondly, one has to rely upon being able to deal with the property price increase through reasonable increases of the policy rate. One hypothesis is that the optimistic mood often prevailing during a boom in the property market means that significant increases of the policy rate are required to have an effect.