RBA Governor Philip Lowe identifies three risks to Australian economy

RBA Governor Philip Lowe identifies three risks to Australian economy
RBA Governor Philip Lowe identifies three risks to Australian economy

The RBA Governor Philip Lowe has identified three risks to the Australian economy.

They were listed in a speech after the October RBA board meeting cut rates to 0.75 percent.

1) The first is that internationally, there seems to be a disconnect between the uncertainty that investors feel about the economic situation and the compensation that they require for holding risk. Normally when people feel uncertain about the future, they want to be compensated for taking on risk. At the moment though, despite the uncertainty, credit spreads are low and asset prices are generally high. At our meeting today we talked about the possibility that a shock somewhere in the global system could cause a recalibration, leading to a disruptive repricing of risk.

2) The second issue is that the resilience of Australia's financial system has steadily improved over recent times. The core capital ratios of our banks are now well within the top quartile of banks around the world. Our banks are well placed to withstand a wide range of shocks and their position will be further strengthened as they meet requirements to increase their loss absorbing capacity further over the next few years.

Lending standards have also been strengthened, although in some areas the pendulum may have swung a bit too far. It is important that our financial institutions support small businesses in particular. Lenders should not be so scared of making a loan that goes bad that they don't provide the credit that the economy needs. One other risk area that we are paying close attention to is cyber and technology risks. Banks' systems have become more complex and digital platforms are now key to banking. We need to make sure that these systems are safe and resilient.

3) The third issue is that while the Australian household sector has a high level of debt, it has also built up substantial buffers. All up, the balances in mortgage offset accounts and redraw facilities amount to 16 per cent of outstanding housing debt. This is equivalent to around 2½ years of required mortgage payments at current interest rates. It is important to recognise though that this figure masks a lot of variation across households. We estimate that around a quarter of households with a mortgage have either no buffer or a very small one.

Loan arrears remain low, although they have risen over recent years. Also, we estimate that for almost 4 per cent of borrowers their current loan balance exceeds the value of their property. Over half of these borrowers are in Western Australia where there has been a large and persistent decline in housing prices. So this is an area that bears watching, Dr Lowe noted.

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