RBA Concerns Over High & Rising Household Debt, Next Rate Move Higher

Reserve Bank of Australia Governor Phiilp Lowe speaking at the annual dinner of the Australian Business Economists says the likely next move in interest rates is up rather than down with no strong case for a near-term change in interest rates.

Reserve Bank of Australia Governor Phiilp Lowe speaking at the annual dinner of the Australian Business Economists says the likely next move in interest rates is up rather than down with no strong case for a near-term change in interest rates. The Australian dollar has been steadily falling since $AUDUSD 80.00 was traded, down to .7550 today.

RBA Household Debt Indicators

His speech was titled ‘Evolving Questions’. Household Debt concerns were raised, particuarly with a shock to the system. On the positive for affordability wage pressures are rising in some sectors and the mining transition appears to have been completed..

Speech Highlights

  • There is a weakening case for lower rates as economy picks up
  • The RBA board paying more attention to weak growth in wages and household incomes
  • Our concern has not been the stability of the banking system; the banks are strong and they are well capitalised.
  • Rather, the concern has been that as the household sector takes on ever-more debt relative to its income, the risk of medium-term problems increases. This is especially so when this debt is taken on in an unusually low-interest rate environment.
  • Increased retail competition likely to restrain inflation for the moment (sounds like a throwback to some of the Fed’s verbiage looking for a reason)
  • There has been some cooling in the Sydney housing market

Lowe said there are three sets of questions that have occupied much of our time over the past year.

  1. The first is how the final stages of the transition to lower levels of mining investment would play out.
  2. The second is the degree to which an improving labour market would translate into a pick-up in wage growth and inflation.
  3. And the third is the nature of risks stemming from high and rising levels of household debt and how to deal with those risks.

High and Rising Household Debt

The third question we have focused on over recent times is the implications of the high and rising level of household debt.

The growth in household debt has been outpacing the very low growth in household incomes for a few years now. As a result, the household debt-to-income ratio has risen, although if account is taken of the increased balances held in offset accounts the rise is less pronounced (Graph 10). The low level of interest rates means that even though debt levels are higher, the share of household income devoted to paying mortgage interest is lower than it has been for some time. Perhaps reflecting this, as well as the recent decline in the unemployment rate, aggregate indicators of household financial stress remain quite low.

Monetary Policy

I would like to conclude with what all this has meant for monetary policy over the past year or so.

As you are aware, the Reserve Bank Board has kept the cash rate unchanged at 1.5 per cent since August last year.

In the early part of that period, a central issue was balancing the need to support the economy in the final days of the transition to lower levels of mining investment against the risks stemming from rising household debt. Lower interest rates might have provided a bit more support, but would have done so partly by encouraging people to borrow yet more money, thus adding to the risks. The Board’s judgement was this would not have been consistent with its broad mandate for economic stability. Accordingly, with the economy expected to pick up and the unemployment rate to come down gradually as the mining investment transition came to an end, the Board judged it appropriate to hold the cash rate at 1.5 per cent. We were prepared to be patient in the interests of medium-term economic stability.

Souce: RBA – Evolving Questions

From The TradersCommunity Research Desk

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