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Reserve Bank governor Philip Lowe has warned that the recent public scrutiny of the banks will lead to even tighter lending policies and a rise in rates.
Speaking at a Reserve Bank Board Dinner in Adelaide on Tuesday, just hours after the central bank announced that the cash rate will remain unchanged for the 19th consecutive month, the governor suggested that mortgage lending is about to get even harder.
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“Domestically, for some time, we have seen the main risk to be related to household balance sheets. For a while, trends in household credit were quite concerning,” Mr Lowe said.
The governor added: “On this front, things now look less worrying than they were a while back, although the level of household debt remains very high, which carries certain risks. In terms of financing, we also discussed the potential for some tightening in financial conditions in Australia. In the United States, the cost of US dollar funding has increased for reasons not directly related to monetary policy and this increase is flowing through into higher money market rates in Australia.
“We expect some of this to be reversed in time, although it is difficult to tell by how much and when. It is also possible that lending standards in Australia will be tightened further in the context of the current high level of public scrutiny. We will continue to watch these issues carefully.”
Last week, APRA announced that its 10 per cent benchmark on investor loan growth will be removed. However, the banking regulator is now working with ADIs to address debt-to-income risks, something that the Reserve Bank has repeatedly flagged over the past 12 months.
Mr Lowe also addressed the issue of monetary policy in his speech, noting that while it may look as if the RBA has little to do when it meets on the first Tuesday of every month, the board actually “diligently assess[es] the pulse of the Australian economy”.
“We also deliberate carefully over what setting of monetary policy will best deliver low and stable inflation in Australia. As we conduct those deliberations, we are conscious that our ultimate objective is enhancing the economic prosperity and welfare of the Australian people,” Mr Lowe explained.
The RBA governor said that the economy is in better shape than it was a year ago. He noted that there has been progress in lowering unemployment and having inflation return to around the middle of the target range. The RBA expects further progress in these two areas over the next couple of years.
“The other key point is that the progress we are making is only gradual: our central scenario is for a gradual pick-up in wages growth, a gradual lift in inflation and a gradual reduction in the unemployment rate,” Mr Lowe said.
“While we might like faster progress, it is encouraging that things are moving in the right direction and are likely to continue to do so.
“If this is how things turn out, it is reasonable to expect that the next move in interest rates will be up.”
[Related: Opinion: APRA's actions will reduce borrowing power]
