Financial risks ‘remain contained’ says RBA

Households are managing to keep financial risks from lending at bay despite soaring interest rates and a high cost of living.

Risks to the Australian financial system from lending to households, businesses and commercial real estate “remain contained” despite soaring interest rates and cost of living pressures, according to the latest assessment by the Reserve Bank.

High inflation and interest rates have put pressure on household budgets over the past two years, but nearly all borrowers continue to service their debts on schedule.

“This is expected to remain the case even if budgets are under pressure for some time,” the RBA said in its financial stability review.

“Few borrowers are in negative equity on their mortgage, limiting the impact on lenders in the event that some default.”

Most households and businesses have continued to manage the pressure inflation and interest rates are placing on their finances.

Households’ ability to manage their finances amid rising interest rates and high inflation is attributed to the strong labour market supporting household income and cuts to household spending.

New data suggests households are managing their borrowings well amid the tricky financial climate.

This was particularly seen with spending in areas such as retail and hospitality, and the fact most households entered this period in a relatively strong financial position, with material spare cash flows and larger savings buffers than before the pandemic.

“This has provided room for households to adjust to higher inflation and mortgage costs, including by saving less and, in some cases, drawing on their existing savings buffers,” the RBA said.

Pressure on households is expected to ease a little as inflation moderates further.

However, an expected rise in unemployment and subdued growth in the economy is “likely to present further challenges for some households and businesses.

“These strains could be magnified if inflation were to remain high for longer than anticipated or if economic conditions were to deteriorate by more than expected,” the RBA said.

The RBA’s liaison program indicates “more people than usual, and including wage earners and mortgagors, are seeking support from community organisations.”

Meanwhile, corporate profitability has remained around pre-pandemic levels for most businesses, and generally-strong balance sheets have limited the risk of widespread corporate stress, based on currently available data.

Conditions have remained challenging in the Australian commercial real estate market, but there is little evidence to date of financial stress among owners of Australian CRE.

Originally published as Financial risks ‘remain contained’ says RBA