On June 25, 2017, the Australian flag appeared in Melbourne, Australia.
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The Reserve Bank of Australia expects households and businesses to face a difficult year and signaled there will be no interest rate cuts in the coming months, but believes the banking sector is well capitalized and can absorb any losses from rising arrears.
The Reserve Bank of Australia (RBA) highlighted the resilience of households, businesses and banks in the face of a decade of high interest rates and painful inflation in its semi-annual financial stability review.
The Federal Reserve Bank of Australia said that “the situation for many Australian households and businesses will continue to face challenges this year”, and the word “challenge” can be seen everywhere in the 39-page review.
Pressure on household budgets was one of the reasons the Reserve Bank of Australia kept interest rates on hold for a third consecutive meeting on Tuesday and abandoned its tightening bias, although it has not ruled out anything on policy.
The RBA noted that about 5 per cent of borrowers with variable rate mortgages spent more than they earned. Unemployment is expected to rise by half a percentage point, putting most affected borrowers into cash flow shortfalls, but this will not translate directly into mortgage defaults, according to estimates.
Fortunately, data released this week showed that the unemployment rate unexpectedly fell to 3.7% in February from a two-year high of 4.1% last month.
The RBA said nearly all borrowers continued to make debt repayments on time and expected to do so even if budget pressures remained high for a prolonged period.
In a scenario analysis, the RBA found that if interest rates increased by another 50 basis points from the current 12-year high of 4.35 per cent, most mortgagors and large businesses would still be able to service their debts.
Futures imply a 38 basis point rate cut this year, with the first rate cut expected in August or September.
The Reserve Bank of Australia estimates that less than 1% of home loans are in arrears for 90 days or more, and less than 2% of highly leveraged borrowers are in arrears. The Reserve Bank of Australia said loan arrears were expected to increase further, but Australian banks were well-capitalized and could cope with the situation.
Slowing inflation, rising real wages and falling interest rates are expected to help ease the pressure on households over the next two years.
Much of the scrutiny has focused on offshore risks, where further weakness in China’s property sector, stress in the international commercial real estate (CRE) market or unexpected and disorderly declines in asset prices could ripple through Australia’s financial system.
“While there is little evidence to date of financial stress among Australian commercial property owners, conditions in the domestic commercial property (particularly office) market remain challenging,” the Reserve Bank of Australia said.
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