Reserve worries on debt

THE Reserve Bank remains reluctant to cut rates, with concerns over households’ ability to handle mounting debt.

RBA governor Philip Lowe said yesterday there were signs household debt was affecting consumer spending – a key contributor to economic growth.

Low interest rates had spurred home buying, and most households were coping well with historically high levels of indebtedness, but they were now expected to save as much as they spent, he said.

“This is a bit different from recent years over which the saving rate had trended down slowly,” Dr Lowe said.

The interplay between spending, saving and borrowing for housing remained a “significant issue” for the central bank, he said.

“It is one of the key uncertainties around our central scenario for the Australian economy,” Dr Lowe told the Australia-Canada Economic Leadership Forum in Sydney.

He said while the RBA was prepared to be flexible to achieve a gradual rise in inflation – which would also support wage increases – it hadn’t witnessed a material change in inflation expectations.

Were Australians to become inured to a pattern of lower inflation for longer, and change their spending habits, the case could be strengthened for a further interest rate cut. But that would bring further risks on the borrowing front, Dr Lowe pointed out.

“In relation to the risks from additional borrowing, it is possible that continuing rises in indebtedness, partly as a result of low interest rates, increase the fragility of household balance sheets,” he said.

“If so, then at some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment. It is difficult to quantify this risk, but it is one that is difficult to ignore.

“As I said, our focus is on the medium term, not just the next year or so.”

This month, the central bank kept the cash rate on hold at 1.5 per cent for a sixth straight month.

Dr Lowe’s comments came as an official wage growth measure revealed Australian pay packets grew by 1.9 per cent in the year to December, matching their lowest pace on record.

Wages rose 0.5 per cent in the three months to December.