Borrowing costs

Australian households well positioned to absorb rising borrowing costs-RBA

FILE PHOTO: Pedestrians walk past the main entrance to the Reserve Bank of Australia building in central Sydney, Australia October 3, 2016. REUTERS/David Gray

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SYDNEY, July 19 (Reuters) – Australian households are generally well placed to absorb rising borrowing costs, although newer home buyers could be vulnerable with interest rates set to rise further in the coming months. come, a senior central banker said on Tuesday.

Reserve Bank of Australia (RBA) Deputy Governor Michele Bullock said households had accumulated around 260 billion Australian dollars ($177.4 billion) in excess savings during the pandemic and most were well ahead of their mortgage payments.

Most also had substantial equity in homes after the sharp rise in prices in recent years, although values ​​in Sydney and Melbourne have started to fall in recent months.

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“I would conclude that overall households are in a pretty good position,” to weather higher rates, Bullock said in a speech in Brisbane, while signaling more increases to come.

The central bank raised rates by 50 basis points to 1.35% in early July, the third hike in as many months, and markets are betting rates could top 3% by the end of the year.

Minutes of the RBA’s policy meeting in July showed the Board discussed the neutral rate – a rate that is neither expansionary nor restrictive – and decided that the current rate of 1.35% was “good lower” than that.

The neutral rate is imprecise but has been estimated in the range of 2% to 3%, with RBA Governor Philip Lowe often naming 2.5% as neutral.

Consumer price figures due next week are expected to show annual inflation accelerating beyond 6% in the June quarter, and the RBA itself expects it to reach at least 7% by Christmas.

Recent data showed unemployment fell sharply in June to a 48-year low of 3.5% as hiring beat all expectations, fueling pressure for bigger rate increases.

Bullock warned that some households would be pressured by higher borrowing costs, including those who had taken out fixed loans in the past two years.

She estimated that half of the fixed-rate loans would face a repayment increase of at least 40% when they expire, resulting in a median increase of around A$650 in monthly repayments.

“While overall it seems unlikely that there will be substantial risks to financial stability stemming from the household sector, the risks are a bit high,” Bullock warned.

How these risks materialize would affect the pace and scope of a further rate hike, she added.

($1 = 1.4654 Australian dollars)

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Reporting by Wayne Cole; Editing by Stephen Coates

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