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RBA warns higher rates may hit spending

Prashant Mehra  |  21 Sep 2017Text size  Decrease  Increase  |  
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SYDNEY - [AAP] A rise in global interest rates could have implications for debt-laden Australian households and the wider economy, Reserve Bank Governor Philip Lowe has warned.

Dr Lowe says an expected lift in interest rates would flow through to Australia over time and the high levels of household debt mean that household spending could be quite sensitive to such increases.

In an address to the American Chamber of Commerce in Australia in Perth on Thursday, Dr Lowe said a rise in global interest rates did not have automatic implications for Australia but an increase would be visible over time.

"Our flexible exchange rate, though, gives us considerable independence regarding the timing as to when this might happen," he said.

Economists widely expect the RBA to start lifting rates from a record low of 1.5 per cent by the middle of next year but some are betting the change could flow through sooner as economic growth and inflation show signs of improvement.

Dr Lowe's comments come within hours of the U.S. Federal Reserve signalling it expects one more increase in rates by the end of the year.

The Fed also said overnight that it would begin in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.

The RBA governor on Thursday reiterated his warning about household debt impacting spending, particularly in an environment of rising rates.

"Having increased their borrowing, households are less inclined to let consumption growth run ahead of growth in incomes for too long," Dr Lowe said.

"Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to."

He said one issue that the Reserve Bank has focused on is the build-up of medium-term risks from growth in household debt persistently outpacing that in household income.

The central bank's concern has been that, in this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets.

However, so far households have been coping reasonably well with the higher debt levels, Dr Lowe said.

 

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