Foreign rate rises to hit households

A RISE in global interest rates could have implications for debt-laden Australian households and the wider economy, Reserve Bank governor Philip Lowe has warned.

Dr Lowe says an expected lift in interest rates would flow through to Australia over time and the high levels of household debt meant consumer spending could be sensitive to such increases.

Addressing the American Chamber of Commerce yesterday, he said a rise in global interest rates did not have automatic implications but would be visible over time.

“Our flexible exchange rate, though, gives us considerable independence regarding the timing as to when this might happen,” he said.

Economists widely expect the RBA to start lifting rates from a record low of 1.5 per cent by the middle of next year but some say the change could flow through sooner as economic growth and inflation show signs of improvement.

Hours earlier the US Federal Reserve signalled it expected one more increase in rates by the end of the year.

The Fed said it would next month start to reduce its $4.2 trillion in holdings of US Treasury bonds and mortgagebacked securities acquired in the years after the 2008 financial crisis. The Australian dollar fell by about US1c following the move and was fetching US79.75c late yesterday.

Dr Lowe reiterated his warning about household debt impacting spending, particularly with rising rates.

“Having increased their borrowing, households are less inclined to let consumption growth run ahead of growth in incomes for too long,” he said.

“Higher levels of debt also mean that household spending could be sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to.”

He said one issue the central bank had focused on was the build-up of medium-term risks from growth in household debt outpacing that in household income.

Its concern had been that, in this environment, a small shock could turn into a serious correction as households sought to repair their balance sheets. However, so far households had been coping reasonably well with the higher debt levels, Dr Lowe said. AAP