On the eve of a tight election, the central bank has warned that rising prices and interest rates will make it harder for some borrowers to make payments.
The quarterly Financial Stability Review released on Friday says with inflation higher and more persistent than expected, there is a risk that interest rates could increase by more than financial markets expect.
“The high level of household debt relative to income in Australia has increased the sensitivity of households and their spending to higher interest rates and a rise in living expenses,” the Reserve Bank found.
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Banks have maintained strong lending standards, but a large share of new housing loans have been written with high debt-to-income ratios, amid sluggish income growth.
“With interest rates still at historically low levels, it is important that lending standards are maintained and that borrowers are prepared for an increase in interest rates,” the central bank says.
The looming hikes in the record low 0.1 per cent official cash rate are a time bomb for whoever wins the federal election in May.
Potentially adding hundreds of dollars per month to the average mortgage payment, all major banks expect the first rise in June, with more to follow this year.
A May rate rise has not been ruled out by market economists, with the first increment tipped to be 15 basis points to 0.25 per cent, and then stepping up in quarter-points after that.
Rate decisions – size and timing – are a matter for the independent central bank.
And there’s nothing to stop the RBA raising rates during an election campaign – it did so in 2007 when Kevin Rudd ousted John Howard.
RBA governor Philip Lowe this week dropped wording about the board being “patient” before it moved to tighten monetary conditions, prompting banks to bring forward their rate rise expectations to June.
Many economists immediately tweaked forecasts, tipping the pandemic emergency rate cuts of 2020 to be unwound from June and a cash rate of 1-1.25 per cent by year-end.
The next inflation reading, due on April 27, is a key factor for the RBA before it decides to pull the trigger.
With an election date call imminent, Prime Minister Scott Morrison said there were multiple pressures on the national economy.
“That’s why strong financial management in the years ahead is going to mean more than anything, and we’ve had a steady hand on those issues,” he said on Friday.
Mr Morrison said similar inflation pressures were also happening in other countries.
“Inflation is running double in the United States what it is here in Australia, and significantly higher in the United Kingdom and in many other developed economies around the world,” he told Melbourne radio 3AW.
Opposition Leader Anthony Albanese said interest rates would likely rise regardless of the party claiming government at the May poll.
“What it does emphasise is the need for a plan to take pressure off the cost of living, not just for the period of the election campaign,” he told reporters in Adelaide.
© AAP 2022