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Australia's central bank sees danger in high household debt

Wednesday, February 22, 2017 - 12:18

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The Reserve Bank of Australia (RBA) has kept interest rates at a record low 1.50 per cent since last easing in August, and Governor Philip Lowe hopes the current setting will be enough to deliver balanced economic growth.

[SYDNEY] The head of Australia's central bank gave the clearest signal yet on Wednesday that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.

The Reserve Bank of Australia (RBA) has kept interest rates at a record low 1.50 per cent since last easing in August, and Governor Philip Lowe hopes the current setting will be enough to deliver balanced economic growth.

"We set out to choose the path that, in our judgement, best promotes the welfare of the Australian people," he said in a speech in Sydney, leaving little doubt that encouraging yet more borrowing would not meet that standard.

Mr Lowe noted that high levels of debt combined with subdued wage growth were already making households wary of spending freely, a drag that was only set to get worse.

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Data out on Wednesday showed annual pay rises were stuck at an all-time low of 1.9 per cent, with ongoing weakness in private sector wages.

Mr Lowe held out the hope that wage growth had finally bottomed, although the RBA's liaison with firms suggested an upturn was not imminent.

A high and rising unemployment rate might add to the case for more stimulus, Mr Lowe said, yet the bank was satisfied that the labour market was heading in the right direction.

"Trends in the labour market are the one to watch in 2017 rather than the inflation prints," said Gareth Aird, an economist at Commonwealth Bank.

"We expect core inflation to continue to print below the Bank's target but that won't be enough for Lowe to cut the cash rate."

The futures market has almost priced out a chance of a rate cut this year, with some investors even toying with the idea of a rate hike by early 2018.

BALANCING RISKS

Mr Lowe, who took over the reins at the RBA last September, has repeatedly stressed about the diminishing returns to the economy from lowering interest rates further, largely due to ballooning household indebtedness.

The ratio of household debt to disposable income is at an all-time peak around 180 per cent, while the saving rate has fallen. Mortgage debt stands at A$1.7 trillion (S$1.86 trillion), larger than the country's annual economic output.

"We have been seeking to balance the risks from having inflation low for a longer period against the risks from attempting to increase inflation more quickly, which would partly occur through encouraging more borrowing," said Mr Lowe.

While there was a danger that low inflation could lead to a self-fulfilling decline in inflation expectations, he did not see "a particularly high risk" of this in Australia.

However, he did see danger in spurring more debt.

"At some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment," he warned.

"It is difficult to quantify this risk, but it is one that is difficult to ignore."

Australia's economy shrank in the third quarter of last year as businesses, consumers and government all cut back on spending, but Mr Lowe said earlier this month that it looked to have bounced back to "reasonable growth".

REUTERS

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