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Ratio of household debt to income ‘at record high’

Ratio of household debt to income ‘at record high’

The governor of the Reserve Bank says that Australian households are carrying more debt than they have before, which is a “significant issue” that the central bank is “watching carefully”.

Speaking at the Australia-Canada Leadership Forum, RBA governor Philip Lowe said that the interaction between consumption, saving and borrowing for housing is a “significant issue” that the bank is watching carefully.

“It is one of the key uncertainties around our central scenario for the Australian economy,” Mr Lowe said. “We are still learning how households respond to higher debt levels and lower nominal income growth.”

Mr Lowe explained that an increase in housing prices has gone “hand-in-hand” with a further pick-up in household indebtedness.

“The ratio of household debt to income is at a record high,” he said, noting that the low level of interest rates means that the debt-servicing burdens are currently not that high.

He remarked that the Australian housing sector is coping “reasonably well” with the high levels of debt, however there are signs that debt levels are affecting household spending.

“In aggregate, households are carrying more debt than they have before and, at the same time, they are experiencing slower growth in their nominal incomes than they have for some decades. For many, this is a sobering combination,” he said.

Reflecting this, Mr Lowe said that the RBA’s latest forecasts have been prepared on the basis that growth in consumption was unlikely to surpass the growth in household income over the next couple of years, which is different from recent years where the rate of saving had trended down slowly.

Inflation targets are ‘not rigid straightjackets’

Mr Lowe highlighted that Australia has experienced low rates of inflation for a few years now, underpinned by a few underlying factors.

Wage growth has been subdued due to the “ongoing slack” in the labour market. Downward pressure on retail prices has also intensified competition, which has affected food prices, with new entrants and overseas retailers in particular putting downward pressure on the prices of a range of goods.

Mr Lowe elaborated: “We are both expecting inflation to increase, but only gradually so. In our case, we expect the disinflationary effects of the earlier decline in commodity prices and the competitive pressures in retailing to wane.

“Some pick-up in wages growth is also expected, although wage increases are likely to remain below average for some time yet. Our liaison with businesses does not suggest that a pick-up in wage growth is imminent, but nor does it suggest that a further slowing is in prospect.”

In light of this, Mr Lowe emphasised that flexible inflation targeting with a medium-term focus continues to be the right monetary policy framework for Australia.

“Inflation targets are flexible, not rigid straightjackets. In our case, the emphasis is very much on medium-term outcomes, rather than the outcome over any particular period,” he concluded.

Ratio of household debt to income ‘at record high’
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