By Swati Pandey
SYDNEY (Reuters) – The governor of Australia’s central bank warned borrowers on Thursday that interest rates would not remain at current record lows forever, as household debt escalates alongside skyrocketing property prices. Households burdened by heavy mortgage debt have a reduced appetite for consumption, making the transmission of monetary policy weaker, Reserve Bank of Australia (RBA) Governor Philip Lowe told a lunch in Brisbane.
The central bank is worried about the possibility of future sharp cuts in household spending if there were to be a deep correction in Australia’s sky-high property prices.
The RBA held official cash rates at a record low 1.50 percent on Tuesday for the ninth straight month as it balanced the risk of rising household debt against subdued inflation and wages growth.
But on Thursday Lowe pointed out that households should be prepared for an increase in interest rates in Australia “at some point.”
“This is not a signal about the near-term outlook for interest rates… but rather a reminder that over time we could expect interest rates to rise, not least because of global developments,” he said.
“We should not expect interest rates always to be this low.”
The RBA cut rates in May and August last year to prop up domestic demand but the risk of stoking indebtedness has forced it to stand pat since, even though core inflation is stuck below its 2-3 percent target band.
Property prices Sydney and Melbourne – Australia’s biggest cities – are racing at a blistering 16 percent and 15 percent respectively.
At the same time, the ratio of household debt to income has hit all-time highs while wages grow at the slowest pace on record, making the economy less resilient to future shocks, Lowe added.
With cash rates at an all-time low and runaway property prices, many Australians have found it attractive to borrow money to invest in housing. Speculative investors account for 30-40 percent of new mortgage loans.
“Given the high levels of debt and housing prices, relative to incomes, it is likely that some households (will) respond to a future shock to income or housing prices by deciding that they have borrowed too much,” said Lowe.
“An otherwise-manageable downturn could be turned into something more serious.”
However, Lowe said borrowing was not the underlying cause of higher house prices, but had instead acted as a “financial amplifier”.
Australian regulators announced measures earlier this year to restrain lending to speculative property investors and to tighten lending standards in an attempt to cool the sizzling market. There were tentative signs of a cooling off in April but Lowe made no reference to it.
He noted, however, that Australian banks were soundly capitalized and could withstand a significant correction in the property market, albeit with some hit to profitability.
Lowe added that the RBA was “carefully” monitoring the labor market for signs the A$1.7 trillion economy is picking up.
It expects growth to average around 3 percent or so over the next few years, but some economists are less cheery.
“We have downgraded our forecasts for consumer spending and lowered our housing investment forecasts for next year,” said Citi Economist Paul Brennan said in a note.
“It will be harder for the economy to grow above trend and it will become more reliant on infrastructure spending, non-mining business.”
(Reporting by Swati Pandey; Editing by Sam Holmes and Eric Meijer)