Turnbull warns on rate hikes, debt risks

The Prime Minister has warned Australian borrowers to brace for interest rate rises while acknowledging the “high levels of indebtedness”.

Speaking at the Economic and Social Outlook Conference in Melbourne last week, the Prime Minister said: “Monetary policy at the moment remains accommodative, but rates are more likely to go up than down.”

Mr Turnbull’s prediction comes just days after the minutes of the RBA’s July meeting were released, in which it was estimated that the “neutral real interest rate” was 3.5 per cent.

Speaking at the conference, Mr Turnbull added: “They [the RBA] are saying that the neutral real interest rate they think is about one per cent. If you assume that inflation is two and a half, then that would indicate a nominal cash rate of three and a half.

“Now what they’re not saying is that they’re going to increase the cash rate to three and a half per cent next month.”

However, the Prime Minister recommended that households “in particular” and businesses should be aware of potential rate increases.

“You need to remember that asset price movements go in two directions, and particularly this is relevant to housing. I know it’s been a pretty good one way bet for a long time, but it’s going to be important for people to be prudent.”

The Prime Minister said the banks are “clearly very alert” to asset price movements, pointing to changes in lending policy in terms of interest-only and investment loans.

“My sense is that this risk is being well managed. But it is high levels of indebtedness that are incurred with low levels of interest rates always pose a risk when you’ve got the prospect of an increase in rates. Particularly if it’s been all built on an assumption of rising asset prices.”

The official cash rate of the Reserve Bank of Australia (RBA) has remained at its record low of 1.5 per cent since August 2016. However, Mr Turnbull joins the ranks of ex-RBA members and lenders in predicting a rate hike.

The RBA will hold their meeting to decide the official cash rate for August on the first of that month.

[Related: RBA warns of mortgage competition risks]

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Lucy Dean

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