SYDNEY (Reuters) - High household debt in Australia could make the economy less resilient to shocks and complicate future interest rate decisions, the country’s central bank said on Friday.
A long boom in Australia’s housing market that ended in 2017 had sent the household debt to income ratio to all-time highs, prompting regulators to tighten bank lending standards which in-turn led to home prices crumbling.
The recent property downturn together with miserly wage growth have squeezed household balance sheets and hurt consumer spending, a major reason why the Reserve Bank of Australia (RBA) cut interest rates twice since June to a record low of 1%.
“Movements in asset values and leverage may be more important for economic developments than in the past given the already high levels of debt on household balance sheets,” the RBA said in its 2019/20 corporate plan.
The household debt to income ratio is above 190%, among the highest in the developed world.
“Especially in the context of weak growth in household income, high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks,” it added.
The RBA noted Australia’s financial system was currently resilient, supported by strong earnings at the country’s biggest banks and higher regulatory capital ratios.
It was “continuing to closely monitor” developments in residential mortgage lending and the risks arising from the high level of household indebtedness, the RBA added.
Home prices are now showing early signs of revival thanks to the rate cuts and government tax rebates to millions of Australians.
The RBA said regulators “stand ready to consider further measures” to address any risks in the system.
The RBA also reiterated that a flexible medium-term inflation target was the “centerpiece” of its monetary policy framework. There had been calls for the RBA to lower the target given inflation has been running stubbornly below 2% for the last few years.
Last month, Governor Philip Lowe pushed back against the idea that central banks simply cannot achieve their inflation targets, saying policymakers were seeking to deliver “low and stable” inflation in a way that maximizes the welfare of the society.
Reporting by Swati Pandey; Editing by Jacqueline