Households cautious after interest rate rises - RBA Governor

RECENT interest rate rises have made households more cautious in their borrowing behaviour, the Reserve Bank says.

RECENT interest rate rises have made households more cautious in their borrowing behaviour, the Reserve Bank says.

Households have sensed that increased indebtedness may leave them vulnerable to shocks such as falling income and are exhibiting cautious economic behaviour, RBA Governor Glenn Stevens says.

"We see at present a certain caution in their behaviour - even though unemployment is low, and measures of confidence have been quite high, consumer spending has seen only modest growth," Mr Stevens told an audience in western Sydney.

"The long downward trend in the saving rate seems to have turned around and I think we are witnessing, at least just now, more caution in borrowing behaviour.

"Of course this will have been affected by the recent increase in interest rates, but the level of rates is not actually high by the standards of the past decade or two.

"We can't rule out something more fundamental at work."

The RBA lifted the cash rate six times between October last year and May to its current 4.5 per cent.

Mr Stevens said the big rise in debt over the past decade had come from the household sector.

But he said mortgage arrears rate was low by global standards and borrowers had serviced household debt levels very well.

But the RBA chief said it wouldn't be wise to let debt levels rise unabated over the years ahead.

"To be clear, my message is not that this has been a terrible thing," he said.

"(But), one would think that, however well households have coped with the events of recent years, further big increases in indebtedness could increase their vulnerability to shocks - such as a fall in income - to a greater extent than would be prudent.

Mr Stevens said the direct effects of the European debt crisis would not be large because Europe only takes about five per cent of our exports.

But the economy is still vulnerable to its effect on resource prices and the availability of global capital.

"Those exports have been declining over the past few years anyway because the euro area has been weak for a while. So that direct effect doesn't seem likely to be all that large,'' he said.

"It is usually the case, however, that the most important impacts on Australia from these sorts of events are not the direct export effects, but those that come through the broader global channels - the impact on world and Asian growth, on resource prices and on the cost and availability of global capital.

"How big those effects may turn out to be remains to be seen.''

But even if there is a knock on effect from the EU crisis, Australia has the advantage of low public debt, with budget deficits under control and scheduled to decline, he says.

Among Australia's other advantages is a banking system in good shape with little exposure to the European sovereigns having the biggest problems, and generally better than expected asset quality.

"The flexibility afforded by our floating currency, coupled with credible monetary and fiscal policies, are all advantages in periods of global uncertainty,'' Mr Stevens said.

"This doesn't mean there will be no effects.

"But these factors put us in the best position to ride through this particular event, even if it does get worse.''