SYDNEY — Risks to financial stability in Australia are “somewhat elevated” and could worsen if unemployment were to rise, Reserve Bank of Australia Deputy Governor Michele Bullock said on Tuesday.
Assessing whether Australian households are prepared for further rate hikes, Bullock warned in a speech that some lower-income households will feel the effects of rate hikes as mortgage payments continue to rise.
“While overall it seems unlikely that there will be any significant financial stability risks from the household sector, the risks are somewhat heightened,” Bullock said. “Some households will find that rate hikes hurt their debt service burden and cash flow.”
“While current strong job growth means people will have jobs to service their mortgages, how the risks play out will be affected by the future trajectory of job growth,” she said.
Australia’s unemployment rate fell to 3.5% in June, the lowest since August 1974.
Bullock, who has worked primarily on financial stability at the RBA, said inflation and employment results will determine how far and how quickly the central bank hikes official interest rates next year.
“I would conclude that households are in a pretty good position overall. The sector as a whole has large liquidity buffers, most households have significant equity in their homes and lending standards have been more cautious in recent years,” she said.
Much of Australia’s high household debt is held by high-income households that are able to service their debt, and many borrowers are already repaying well in excess of what is required, Bullock said.
With many mortgage borrowers facing a sharp increase in mortgage payments over the next year, they have time to prepare, she said.
Estimates of how much the RBA will raise interest rates over the next year vary, but financial markets are currently betting that the official cash rate will rise well above 3.0% in 2023.
However, ANZ Bank forecast on Tuesday that the benchmark interest rate would rise from the current 1.35% to over 3.0% by the end of this year.
The RBA meets in early August and economists expect another 50 basis point hike in interest rates. Some are warning that the move could be 75 basis points or even 100 basis points.
In response to higher-than-expected inflation, the RBA began raising interest rates in May.
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