Australian central bank frets on financial stability

> Spiralling property prices, soaring household debt prompt Moody’s to downgrade country’s biggest banks

SYDNEY: Australia’s central bank ramped up its rhetoric on financial stability risks amid runaway property prices and soaring household debt, a threat that prompted ratings agency Moody’s to downgrade the country’s biggest banks this week.

Fears over the effects of a sharp correction in the housing market mean interest rates in Australia are likely to stay at an all-time low of 1.5% for a considerable time – even as some global central banks turn hawkish.

The Reserve Bank of Australia (RBA) last cut interest rates in August 2016. It has since stood pat, juggling the risks of record household debt, tepid inflation and weak consumer spending.

RBA board members spent considerable time at their June policy meeting discussing the relationship between financial stability and monetary policy. They even reviewed the academic literature and policy experience in a number of countries, including Sweden and the US.

“This highlights the focus of monetary policy at present, with considerations around financial stability trumping almost everything else including sub-target inflation,” said Su-Lin Ong, head of economics at RBC.

“This will keep housing, lending, and credit growth dynamics firmly in the spotlight and at top of the RBA’s list as it ponders the appropriate stance of policy.”

Australia’s household sector is under severe strain with debt-to-income at a record high 189% while wages are crawling at the slowest pace ever. The share of national income going to households has shrunk to its smallest since 1964 while the savings rate has fallen to a 10-year low.

That is one reason the RBA is unlikely to hike official rates in coming months because to do so would push up mortgage costs for already indebted Australian families.

Yet it fears easing further might only encourage more borrowing by investors to speculate in the housing market.

Australia’s super-easy policy stance contrasts with global central banks in the mood to nudge interest rates higher. – Reuters