Australian Central Bank Cautions Against Over-Borrowing as Interest Rates Expected to Fall
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Australia central bank warns households against over-borrowing once rates fall
SYDNEY, Sept 26 (Reuters) - Australia's central bank on Thursday cautioned borrowers against taking on excessive debt when interest rates start to fall and risking a boom/bust cycle, though it judged the financial system remained resilient overall. In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) again highlighted the resilience of households, businesses and banks in the face of decade-high interest rates and painful inflation. Advertisement · Scroll to continue A small but growing share of mortgage holders were falling behind on payments, and an increasing number were making the difficult choice to sell their homes to escape default. Yet, the share of borrowers experiencing severe financial stress remains small at less than 2%, the RBA said, while 0.5% of loans in arrears were also in negative equity. The RBA expects household budget pressures to ease once interest rates start to fall, but also saw dangers in that. Advertisement · Scroll to continue "Domestic vulnerabilities could increase if households respond to any easing in financial conditions by taking on excessive debt," said the RBA in a 45-page review, warning that the risk could be magnified if lending standards drop. It still judged that the vast majority of borrowers would be able to service their debt under a range of scenarios and with some selling their properties to repay their loans and avoid defaulting, the risk to the financial system remains limited. The central bank has kept rates steady since November, judging that the cash rate of 4.35% - up from a record-low 0.1% during the pandemic - is restrictive enough to bring inflation to its target band of 2-3% while preserving employment gains. Policymakers have ruled out a near-term reduction in interest rates as it waits for inflation to cool further. Fortunately, data out on Wednesday showed headline inflation slowed to 2.7% in August, back in the target band, while the core measure eased to 3.4%, keeping a rate cut by the year end in play. Swaps imply a 72% chance for an easing in December Much of the review was focused on risks from offshore, where operational vulnerabilities from a digitalised world, imbalances in China's financial sector and disorderly adjustments in global asset prices could spill over to Australia's financial system. It saw risks to the financial system from the mass adoption of AI and cloud computing which was concentrated in a few third party providers, making the system vulnerable to outages and cyber attacks. Domestically, the RBA reiterated that banks are well-capitalised and even though arrears in non-bank lenders' loan book have picked up, risk to financial stability remained contained. It also noted that business insolvencies had increased, but were still only slightly above pre-pandemic levels. (Reporting by Stella Qiu, editing by Wayne Cole) Keywords: AUSTRALIA RBA/BANKING Our Standards: The Thomson Reuters Trust Principles., opens new tab
[2]
Australia central bank warns households against over-borrowing once rates fall
SYDNEY, Sept 26 (Reuters) - Australia's central bank on Thursday cautioned borrowers against taking on excessive debt when interest rates start to fall and risking a boom/bust cycle, though it judged the financial system remained resilient overall. In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) again highlighted the resilience of households, businesses and banks in the face of decade-high interest rates and painful inflation. A small but growing share of mortgage holders were falling behind on payments, and an increasing number were making the difficult choice to sell their homes to escape default. Yet, the share of borrowers experiencing severe financial stress remains small at less than 2%, the RBA said, while 0.5% of loans in arrears were also in negative equity. The RBA expects household budget pressures to ease once interest rates start to fall, but also saw dangers in that. "Domestic vulnerabilities could increase if households respond to any easing in financial conditions by taking on excessive debt," said the RBA in a 45-page review, warning that the risk could be magnified if lending standards drop. It still judged that the vast majority of borrowers would be able to service their debt under a range of scenarios and with some selling their properties to repay their loans and avoid defaulting, the risk to the financial system remains limited. The central bank has kept rates steady since November, judging that the cash rate of 4.35% - up from a record-low 0.1% during the pandemic - is restrictive enough to bring inflation to its target band of 2-3% while preserving employment gains. Policymakers have ruled out a near-term reduction in interest rates as it waits for inflation to cool further. Fortunately, data out on Wednesday showed headline inflation slowed to 2.7% in August, back in the target band, while the core measure eased to 3.4%, keeping a rate cut by the year end in play. Swaps imply a 72% chance for an easing in December Much of the review was focused on risks from offshore, where operational vulnerabilities from a digitalised world, imbalances in China's financial sector and disorderly adjustments in global asset prices could spill over to Australia's financial system. It saw risks to the financial system from the mass adoption of AI and cloud computing which was concentrated in a few third party providers, making the system vulnerable to outages and cyber attacks. Domestically, the RBA reiterated that banks are well-capitalised and even though arrears in non-bank lenders' loan book have picked up, risk to financial stability remained contained. It also noted that business insolvencies had increased, but were still only slightly above pre-pandemic levels.
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The Reserve Bank of Australia warns households about the risks of excessive borrowing when interest rates decline, emphasizing the importance of maintaining financial stability.
RBA's Cautionary Stance on Future Borrowing
The Reserve Bank of Australia (RBA) has issued a stern warning to Australian households, urging them to exercise caution and avoid over-borrowing when interest rates eventually decrease. This advisory comes as the central bank anticipates a future easing of monetary policy, which could potentially lead to lower borrowing costs
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.Current Economic Landscape
Australia's economy has been grappling with elevated inflation, prompting the RBA to implement a series of interest rate hikes. The cash rate currently stands at a notably high 4.10%, marking the most aggressive tightening cycle in the country's modern history
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. This monetary tightening aims to curb inflationary pressures and maintain economic stability.Anticipating Future Rate Cuts
While the exact timing remains uncertain, financial markets are speculating that the RBA might begin reducing interest rates as early as mid-2024. This projection is based on the expectation that inflation will gradually return to the central bank's target range of 2-3%
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. The potential for lower rates in the future has raised concerns about possible excessive borrowing behavior among households.RBA's Warning on Household Debt
Michele Bullock, the incoming governor of the RBA, emphasized the need for households to carefully consider their borrowing decisions. She cautioned against assuming that interest rates would remain low indefinitely, stating, "The bank will be watching closely to ensure that the lessons from this episode are not forgotten"
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. This statement underscores the RBA's commitment to maintaining financial stability and preventing unsustainable debt accumulation.Impact on the Housing Market
The Australian housing market, known for its high prices and household debt levels, is particularly sensitive to interest rate fluctuations. The RBA's warning is partly aimed at preventing a potential housing bubble fueled by excessive borrowing when rates decline
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. By encouraging responsible borrowing practices, the central bank hopes to mitigate risks to both individual households and the broader financial system.Related Stories
Balancing Economic Growth and Financial Stability
The RBA faces the challenging task of balancing economic growth with financial stability. While lower interest rates can stimulate economic activity, they also carry the risk of encouraging unsustainable borrowing practices. The central bank's proactive approach in warning households reflects its commitment to maintaining a stable financial environment even as it navigates potential future rate cuts
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.Long-term Economic Outlook
As Australia's economy continues to evolve, the RBA's cautionary stance highlights the importance of sustainable financial practices. The central bank's focus on preventing over-borrowing aligns with its broader mandate of ensuring long-term economic stability and growth. By encouraging responsible financial behavior now, the RBA aims to safeguard the economy against potential future shocks and maintain resilience in the face of changing economic conditions
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