Cautious mood to prevail, Reserve Bank warns

THE bleak mood engulfing households was unlikely to lift any time soon, the Reserve Bank said, as consumers sought to rein in historically high debt levels.

By InvestSMART · 24 Sep 2011

By InvestSMART ·
24 Sep 2011

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THE bleak mood engulfing households was unlikely to lift any time soon, the Reserve Bank said, as consumers sought to rein in historically high debt levels.

In its latest review of the nation's financial health, the central bank warned that the "prevailing mood of caution" in households would remain for now, amid signs of fragile confidence among consumers.

While this was likely to result in subdued credit growth for banks, the Reserve said lenders were in good health and were better prepared to cope with any crisis on credit markets.

The Financial Stability Review, published yesterday, said the increasingly severe tremors on global markets were affecting the balance sheets of banks, businesses and households. Although the ratio of household debt to income had fallen slightly, the Reserve said its current level of 154 per cent was "quite high" and many households were making extra repayments to get on top of their mortgages.

Australian shares are down more than 10 per cent since the start of July. This has wiped more than 5 per cent from the value of a typical superannuation fund.

"Given that household net worth declined in the wake of renewed volatility in global financial markets, the prevailing mood of caution appears unlikely to lift in the near term," the report said.

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Frequently Asked Questions about this Article…

What did the Reserve Bank say about the current household mood and consumer spending?

The Reserve Bank warned of a 'prevailing mood of caution' among households, saying consumers are likely to keep reinning in spending and debt for now. The bank’s Financial Stability Review said this cautious sentiment is unlikely to lift in the near term.

Why are Australian households cutting back and how high is household debt?

The article says households are cutting back because of fragile confidence and historically high debt levels. The Reserve Bank noted the household debt‑to‑income ratio is around 154% — a level it described as 'quite high' — and many households are making extra mortgage repayments to reduce debt.

How will household caution affect bank lending and credit growth?

According to the Reserve Bank, the prevailing cautious mood is likely to result in subdued credit growth, meaning households and businesses may borrow less and banks may see slower loan growth in the near term.

Are Australian banks in good shape despite market volatility?

Yes. The Financial Stability Review said lenders are in good health and better prepared than before to cope with crises in credit markets, even though global market tremors are affecting balance sheets across banks, businesses and households.

How have recent market moves affected shares and superannuation funds?

The article reports Australian shares have fallen by more than 10% since the start of July, which has wiped more than 5% from the value of a typical superannuation fund, contributing to a decline in household net worth.

What risks did the Financial Stability Review highlight for everyday investors?

The review highlighted increasingly severe tremors on global financial markets that are affecting balance sheets of banks, businesses and households. It linked that volatility to weaker household net worth and a sustained mood of caution among consumers.

What does 'subdued credit growth' mean for everyday investors and the economy?

The article explains 'subdued credit growth' as a likely slowdown in borrowing by households and businesses due to cautious sentiment and high household debt. That slowdown can signal reduced economic activity until confidence and borrowing recover.

Should I change my investments because of the Reserve Bank’s warning?

The article does not offer specific investment advice. It documents recent market volatility, a drop in share values and a cautious outlook from the Reserve Bank — facts everyday investors can use to reassess risk tolerance and monitor portfolios, but any changes should be based on personal goals and advice from a licensed financial professional.