SYDNEY — Financial stability risks in Australia are a “little elevated,” and could worsen if unemployment were to head higher, Reserve Bank of Australia Deputy Gov., Michele Bullock, said Tuesday.
In assessing whether Australian households are prepared for further interest rate increases, Bullock warned in a speech that some lower-income households will feel a sting from interest rate increases, as mortgage repayments are set to rise further.
“While in aggregate it seems unlikely that there will be substantial financial stability risks arising from the household sector, risks are a little elevated,” Bullock said. “Some households will find interest rate rises impacting their debt servicing burden and cash flow.”
“While the current strong growth in employment means that people will have jobs to service their mortgages, the way the risks play out will be influenced by the future path of employment growth,” she said.
Australia’s unemployment rate fell to 3.5% in June, its lowest since August 1974.
Bullock, who has worked at the RBA largely in the area of financial stability, said that inflation and employment outcomes will determine how far, and how fast, the central bank raises official interest rates over the next year.
“I would conclude that as a whole, households are in a fairly good position. The sector as a whole has large liquidity buffers, most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent,” she said.
Much of Australia’s elevated household debt is held by high-income households that have the ability to service their debt and many borrowers are already making repayments well above what is required, Bullock said.
With many mortgage borrowers facing a big rise next year in mortgage payments, there is time for them to prepare, she said.
Estimates on how much the RBA will raise interest rates over the next year vary, but financial markets are currently betting the Official Cash Rate will rise well above 3.0% in 2023.
However, ANZ Bank forecast on Tuesday that the cash rate would jump to more than 3.0% by the end of this year, from 1.35% currently.
The RBA meets in early August, and economists expect a further 50 basis points increase to the cash rate. Some warn that move could be 75 basis points, or even 100 basis points.
The RBA started raising its cash rate in May, responding to higher than expected inflation.