RBA Governor says more likely rates go up than down

RBA Governor says more likely rates go up than down
RBA Governor says more likely rates go up than down

Reserve Bank of Australia chief Philip Lowe said borrowers should “prepare for higher interest rates.”

Dr Lowe said its “more likely” that interest rates will “go up than down”, in response to a question at a business forum in Perth yesterday.

Dr Lowe said he noted that markets are pricing that interest rates will go up than down.

“I’d agree with that. The second is that it’s some time before an interest rate rise will occur and I’d also agree with that.

"More likely it will go up but it’s not for some time,” Dr Lowe said.

“People should prepare for higher interest rates. They’re rising globally and if things work out well here over time — I’m not saying when — we’d expect higher rates here.

"In my view that would be a positive development for the economy.”

He noted there are scenarios where interest rates would have to be cut.

“People don’t like hearing this but we’d all be better off if the next interest rate move is up rather than down,” he said.

In a speech titled “The Next Chapter,” the RBA governor said caution will need to exhibited by the RBA as soaring household debt levels will require policy makers to act carefully.

The RBA Governor Philip Lowe addressed how Australia deals with the higher level of household debt and higher housing prices, especially in a world of more normal interest rates.

It is likely that higher levels of household debt change household spending patterns, he noted.

"Having increased their borrowing, households are less inclined to let consumption growth run ahead of growth in incomes for too long.

"Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to.

"To date, households have been coping reasonably well with the higher debt levels," he said.

He noted the aggregate debt-to-income ratio has trended higher, but the ratio of interest payments to income is not particularly high, given the low level of interest rates (Graph 8).

Housing loan arrears remain low, although they have increased a little recently, especially in Western Australia.

Click to enlarge

Graph 8
RBA Governor says more likely rates go up than down

Over recent times, one issue that the Reserve Bank has focused on is the build-up of medium-term risks from growth in household debt persistently outpacing that in household income.

"Our concern has been that, in this environment, a small shock could turn into a more serious correction as households seek to repair their balance sheets.

"We have been working with APRA through the Council of Financial Regulators to address this risk.

"The various measures are having a positive impact in improving the resilience of household balance sheets."

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Interest Rates

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