Reserve Bank still worried about household debt, minutes show

The RBA has expressed increasing confidence in the economy, but remains watchful of risks due to high household debt.

21/09/2017 RBA governor Philip Lowe as he addresses the American Chamber of Commerce at Hyatt Regency. pic Colin Murty The Australian

Australia’s central bankers expressed increasing confidence in the economic outlook during their latest policy meeting, although they remain watchful of risks due to high household debt levels.

The Reserve Bank of Australia has shown it is in no rush to shift interest rates, having left the benchmark cash rate unchanged for a 14th month running at the meeting earlier this month, as wages and inflation have remained subdued.

That despite growth in major advanced economies having strengthened since last year and a number of central banks either starting or indicating a move toward reducing monetary stimulus.

Minutes of the October 3 meeting, released today, showed that the board judged holding the cash rate steady was consistent with sustainable economic growth and attaining its inflation target over time.

Members noted that recent data pointed to subdued price pressures, and despite expectations for a significant rise in retail electricity prices in the latest quarter a number of businesses, particularly in the retail and manufacturing sectors, appeared to be largely absorbing higher energy costs into their margins rather than passing them through to final prices.

Current and prospective strength in employment in Australia is expected to support household spending, although that continues to be constrained by slow growth in real wages, and high levels of household debt, the central bank said.

Wage growth is expected to increase gradually, which in turn is likely to contribute to a gradual rise in inflation over time, it said.

Increased spending on public infrastructure projects supported a brighter outlook for activity in the non-mining sector, even as the drag on growth from the end of the country’s long-running boom in mining investment nears completion.

The minutes showed that domestic household balance sheets remain a central area of attention for policymakers. High household debt has continued to edge higher amid low interest rates and weak income growth, although members noted that relative to income, borrowing from banks was only slightly higher than a decade ago.

High debt levels mean that households are sensitive to any increase in borrowing rates, which has prompted regulators to take steps to curtail riskier lending by banks, most recently by capping growth in interest-only mortgage lending. According to the minutes, board members discussed the importance of continuing to assess the various risks in household balance sheets.

Still, the bankers noted that profits of Australian banks remained at a high level, allowing lenders to increase their capital through retained earnings and dividend reinvestment schemes. Also, the banks’ non-performing loans were a very low share of their assets compared with banks in other advanced economies.

The minutes offer further confirmation that the central bank doesn’t believe lower interest rates are needed, said Paul Dales, chief economist at Capital Economics. “The main message is that economics conditions are getting better, but that the RBA is not thinking about raising rates yet,” he said in a research report.

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