SYDNEY (Reuters) - The head of Australia’s central bank on Tuesday urged lenders to improve credit supply to the economy, hours after cutting its cash rate to a historic low, saying lending standards have been tightened too far in some cases.
The Reserve Bank of Australia (RBA) has slashed interest rates by 75 basis points since June to 0.75%, leaving little room for more reductions and raising the possibility of unconventional policy easing.
Yet, there are little signs of progress in boosting consumption, employment or inflation, with the country’s housing market the only sector showing signs of a revival.
“The resilience of Australia’s financial system has steadily improved over recent times,” RBA Governor Philip Lowe said in a speech in Melbourne. “Lending standards have also been strengthened, although in some areas the pendulum may have swung a bit too far.”
“Lenders should not be so scared of making a loan that goes bad that they don’t provide the credit that the economy needs.”
Financial futures <0#YIB:> imply a near 60% chance the RBA will cut rates again to 0.5% next month.
One risk is that further cuts to interest rates would fuel a debt binge in property sector when the household debt-to-income ratio in Australia is already at a record peak of 190%.
But the country’s household sector had also built up substantial buffers at an aggregate level, Lowe said foreshadowing the RBA’s six-monthly Financial Stability Review ahead of its scheduled release on Friday.
The RBA estimates that around a quarter of households with a mortgage have either no buffer or a very small one. Further, for almost 4% of borrowers their current loan balance exceeded their property value and over half of them were in Western Australia.
“So this is an area that bears watching,” Lowe noted.
On other threats to financial stability, the RBA board also talked about the possibility that a shock somewhere in the global system could lead to a “disruptive” repricing of risks, he said.
The Board discussed how the Australian economy appears to have reached a “gentle turning point” with low interest rates, government tax rebates, infrastructure spending, housing market stabilization supporting the outlook.
“The economy has been through a soft patch recently, but we are expecting a return to around trend growth over the next year,” he said.
Lowe said the RBA was seeking to make more “assured progress” toward both full employment and its 2% to 3% inflation target which has eluded it for more than three years.
“We still expect to make progress on both fronts, but that progress is slower than we would like. Today’s decision will help,” Lowe said.
He listed geopolitical uncertainties led by the U.S.-China trade and technology disputes as well as a global trend toward lower interest rates among other reasons to keep policy accommodative in Australia.
“As a central bank in a small open economy we have to take the world as we find it,” he said.
“While we might wish it were otherwise, we can’t ignore these global trends and their impact on our economy. So, the Board is watching these global developments.”
Reporting by Swati Pandey; Editing by Kim Coghill