Is a Single Sectorial Credit Growth Threshold Too Restrictive? Evidence from the Output and Inflation

Is a single sectorial credit growth threshold too restrictive? The results show that in cases where household (corporate) credit growth is below 9.5 (9.2) per cent, GDP growth tends to peak at a higher rate compared to when household (corporate) credit growth is above 12.45 (12.6) per cent. The difference is due to inflation responses. Inflation increases by more than double at peak response when household (corporate) credit growth exceeds 12.45 (12.6) per cent compared to when household (corporate) credit growth is below 9.5 (9.2) per cent. The policy implication is that additional credit growth above the normal and high credit growth regimes does not necessarily result in accelerated and incremental GDP growth. But rather induces higher inflation responses. Furthermore, credit growth below normal credit growth helps to contain inflationary pressures and is consistent with price and financial stability to the degree that excessive debt-driven household consumption is contained. Thus, the established credit thresholds contribute to the design of the macro-prudential tools aimed at dealing with sectorial capital requirements under the countercyclical capital buffer in as far as they complement policies aimed at increasing households’ resilience in an economic downturn.