The Australian Flag is seen on June 25, 2017 in Melbourne, Australia.
Darrian Traynor | Stringer | Getty Images
Australia’s central bank expects another tough year for households and businesses, signaling little rate relief in months ahead, but judged the banking sector was well capitalized to absorb any losses from rising arrears.
In its semi-annual Financial Stability Review, the Reserve Bank of Australia, or RBA, highlighted the resilience of households, businesses and banks in the face of decade-high interest rates and painful inflation.
“Conditions will remain challenging for many households and businesses in Australia this year,” the RBA said, with “challenging” freely sprinkled through the 39-page review.
The pressure facing household budgets is one reason the RBA on Tuesday left the interest rates unchanged for the third straight meeting and dropped its tightening bias, although the bank has yet to rule anything in or out on policy.
Around 5% of borrowers with variable rate mortgages have had expenses exceeding their incomes, the RBA noted. It estimated an expected half percentage point increase in the jobless rate would push most affected borrowers into cash flow shortfall, but it wouldn’t translate directly into mortgage defaults.
Fortunately, data out this week showed the unemployment rate unexpectedly dived back to 3.7% in February, from a two-year high of 4.1% the month before.
Nearly all borrowers continued to service their debts on schedule and are expected to be able to do so even if budget pressures remain elevated for an extended period, said the RBA.
In a scenario analysis, the RBA found that most mortgagors and larger businesses would still be able to service debts if interest rates were to increase by another 50 basis points from the current 12-year high of 4.35%.
Futures imply 38 basis points of cuts for this year, with the first rate cut expected in August or September.
The RBA estimated less than 1% of all housing loans are 90 or more days in arrears and less than 2% of high-leveraged borrowers are in arrears. Loan arrears are expected to rise further, but Australian banks are well capitalized to handle such a tick up, said the RBA.
It expected slowing inflation, higher real wages and lower interest rates over the next two years to help ease pressures facing households.
Much of the review was focused on risks from offshore, where further weakness in the Chinese property sector, pressures in international commercial real estate, or CRE, markets or an unexpected disorderly decline in asset prices could spill over to Australia’s financial system.
“Conditions remain challenging in domestic CRE (in particular, office) markets, though there is little evidence to date of financial stress among owners of Australian CRE,” said the RBA.