RBA concern on household debt threat

The Reserve Bank has raised concerns about Australia's low-interest-rate environment, fearing a quicker-than-expected rise in house prices - spurred by low interest rates - could encourage households to take on more debt again.

The Reserve Bank has raised concerns about Australia's low-interest-rate environment, fearing a quicker-than-expected rise in house prices - spurred by low interest rates - could encourage households to take on more debt again.

The view is found in the RBA's monetary policy statement, released on Friday after its decision to cut the official cash rate to a historic low of 2.75 per cent this week.

Australia's dollar dropped to its lowest level since June 2012 overnight on Friday, to US100.47¢, after US employers created 165,000 jobs in April.

The growth in jobs saw the US unemployment rate fall slightly to a four-year low of 7.5 per cent.

Australia's dollar recovered slightly after the release of the RBA's monetary policy statement, and it closed the week near US100.64¢.

"In the household sector, a key risk is that established dwelling prices rise more quickly than assumed, spurred by low interest rates," the RBA statement said.

"The associated boost to wealth and sentiment could in time generate stronger-than-expected consumption growth. If these were accompanied by a return to increasing household leverage, it would raise concerns from a financial stability perspective."

But ANZ economist Justin Fabo said the risk of households taking on more debt was unlikely, given the RBA's view was balanced by a downbeat outlook on employment and income.

"The risk of this happening is low given households' attitudes towards debt appear to have changed substantially since the global financial crisis and because labour market conditions are expected to remain soft," Mr Fabo wrote in a note.

The RBA surprised many in the market when it cut the cash rate by 25 basis points this week. Economists said that meant there was more interest than usual in the monetary policy statement, but the RBA did not use the opportunity to explain why it cut the rate.

"The statement presented a golden opportunity to put forward a strong message given the non-consensus rate cut on Tuesday," Citi economist Paul Brennan wrote in a note to clients. "[But] that the message was mostly a repeat of the benign central view of the February edition suggests that the RBA has no strong conviction to follow up with another rate cut in June."

But TD Securities' Alvin Pontoh said the outlook for inflation was a little softer in the near term than predicted in February, reflecting lower than expected inflation in the first three months of this year.

"On the whole, we get a sense that the view has evolved towards a more cautious one ... particularly on the labour market front," Mr Pontoh said.

But overall, the RBA statement was optimistic about the local economy and its transition to non-mining-led activity.

"Growth of Australian major trading partners is expected to continue to exceed that of the world, reflecting the faster growth of Australia's trading partners in Asia," it said. "The forecast for consumption spending has been revised a little higher since the February statement as prospects for household demand appear slightly more positive."

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles