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RBA: Interest rates might rise sooner than expected

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The Reserve Bank of Australia (RBA) has singled out rising household debt as a major area of concern in its latest public statement, fuelling expectations that interest rates might rise sooner than expected if households keep borrowing at current rates.

The minutes from the RBA’s meeting on August 1, which were released on Tuesday, reveal that the “need to balance the risks associated with high household debt in a low-inflation environment” was top of mind for the central bank’s nine-member board.

“The changes do elevate the focus on financial stability in a way that raises the risk of policy action at some point,” said David Plank, head of Australian economics at Australia and New Zealand Banking Group (ANZ). He suggested that the RBA might lift rates sooner than expected.

While the RBA’s minutes didn’t have the shock value of the previous month’s minutes (which sent the value of the Australian dollar soaring when the central bank appeared to pencil in a 3.5% neutral cash rate), the elevation of household debt alongside the current high unemployment and inflation rates took many economists by surprise.

“If confidence around the achievement of the inflation and employment objectives lifts, then the issue of financial stability could be enough to push the bank into moving earlier,” Plank said.

Household debt as a share of disposable income rose above 190% in March, a record high, bolstered by consistently high annual mortgage growth above 6%, despite regulatory crackdowns on investor lending and higher borrowing rates.

“Overall housing credit growth had continued to outpace the relatively slow growth in household incomes,” the minutes said.

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