Interest rate cut unlikely as RBA flags high debt in Australia

SYDNEY • The head of Australia's central bank yesterday gave the clearest signal yet that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.

The Reserve Bank of Australia (RBA) has kept interest rates at a record low 1.50 per cent since the last easing in August, and governor Philip Lowe hopes the current setting will be enough to deliver balanced economic growth.

"We set out to choose the path that, in our judgment, best promotes the welfare of the Australian people," he said in a speech, leaving little doubt that encouraging yet more borrowing would not meet that standard.

Mr Lowe said high levels of debt combined with subdued wage growth were making households wary of spending freely, a drag that was only set to get worse.

Data out yesterday showed annual pay rises were stuck at an all-time low of 1.9 per cent, with ongoing weakness in private sector wages.

A high and rising jobless rate might add to the case for more stimulus, he said, yet the bank was satisfied that the labour market was heading in the right direction.

"Trends in the labour market are the one to watch in 2017 rather than the inflation prints," said Mr Gareth Aird, an economist at Commonwealth Bank. "We expect core inflation to continue to print below the (RBA's) target but that won't be enough for Mr Lowe to cut the cash rate."

Mr Lowe, who took over the reins at the RBA last September, has repeatedly stressed about the diminishing returns to the economy from lowering interest rates further, largely due to ballooning household indebtedness.

The ratio of household debt to disposable income is at an all-time peak around 180 per cent, and the saving rate has fallen. Mortgage debt stands at A$1.7 trillion (S$1.8 trillion), larger than the country's annual economic output.

While there was a danger that low inflation could lead to a self-fulfilling decline in inflation expectations, he did not see "a particularly high risk" of this in Australia.

But he did see danger in spurring more debt.

REUTERS

A version of this article appeared in the print edition of The Straits Times on February 23, 2017, with the headline 'Interest rate cut unlikely as RBA flags high debt in Australia'. Print Edition | Subscribe