Borrowers can cope with higher interest rates: RBA

However, most of these have large savings buffers. All but 2 per cent of owner-occupiers with variable-rate loans still have at least six months’ worth of savings.

“Strong conditions in the labour market, the large savings buffers accumulated by many borrowers during the pandemic and rising house prices are helping households to adapt to challenging economic conditions,” the Reserve Bank said in its health check of the financial system.

There is consumer resilience from a financial sense, but the trade-off for that is weaker consumer activity.

— ANZ chief economist Richard Yetsenga

“Many households have made adjustments, including reducing their discretionary spending,” the report said.

The estimated $250 billion of additional savings built up during the pandemic largely remains intact, and borrowers in aggregate were adding to mortgage offset and redraw accounts in recent months.

The RBA data on households’ resilience comes a day after official figures showed renewed strength in the labour market. The unemployment rate has dropped sharply from 4.1 per cent to 3.7 per cent after 116,500 jobs were added in February.

In response to the economic resilience, markets have pushed out forecasts of when the RBA will begin cutting the cash rate. Ten days ago, money markets were pricing in a 95 per cent chance of an August cash-rate cut, but that has now fallen to a 60 per cent chance, and traders have shifted their bets to September at the earliest.

The Financial Stability Review pointed out that Australia’s banks were “well prepared to handle an expected increase in loan losses in the period ahead”, given current loan loss levels were low. The report said that although insolvency filings had spiked to pre-pandemic levels, the banks had little exposure to these failed businesses.

Overall, the RBA expects the share of borrowers having a negative cash flow to fall from 5 per cent to below 3 per cent into 2025 as inflation moderates and the cash rate declines.

Even if interest rates remain higher for longer – which the central bank has modelled to capture rates that are 0.5 of a percentage point higher than current projections – its latest analysis says the share of borrowers in negative cash flow will edge up to only 6 per cent.

Goldman Sachs economist Andrew Boak said the RBA seemed “quite sanguine ... even in an upside scenario where the policy rate was to rise a further 50 basis points”.

But the ability of households to service their debts is coming at a cost, as they cut back on discretionary spending.

ANZ chief economist Richard Yetsenga said there was a dichotomy between the financial resilience of households in their ability to repay loans and weaker consumer spending.

“There is consumer resilience from a financial sense, but the trade-off for that is weaker consumer activity,” he said.

ANZ’s economics team is sticking by its call that the RBA will start to cut rates in November.

“We will get some rate cuts eventually, but we probably won’t get a lot. It is all consistent with higher for longer interest rates,” Mr Yetsenga said.

The RBA review comes just days after Reserve Bank governor Michele Bullock said the bank’s next move could be in either direction, after the board chose to maintain the cash rate at 4.35 per cent.

Later in the week, US Federal Reserve chairman Jerome Powell spurred a market rally by paving the way for an interest rate cut in June as the fight to lower inflation to within its target appeared to be won.

The Reserve Bank, too, might be in a position to cut interest rates while the economy is in good health.

“Admittedly, there is a more tangible risk that economic output will hold up better than we are forecasting,” said Capital Economics’ Abhijit Surya.

UK, NZ enter technical recessions

“However, that shouldn’t get in the way of the RBA cutting rates as long as inflation continues to fall back. As is the case in a number of other developed markets, gains on the supply side of the economy should continue to support the disinflationary process going forward.”

While the US and Australian economies are proving resilient, higher interest rates are beginning to bite in some countries. The United Kingdom and New Zealand, which have among the highest interest rate settings among developed economies, have entered technical recessions amid slowing GDP growth.

That led the RBA to conclude that the financial system would stand firm, although it could not discount an external shock.

The bank identified weakening conditions in China’s property market and US commercial real estate as potential sources of offshore contagion. Australian commercial real estate was an issue but did not appear to pose a financial stability risk, it said.

Another risk is that central banks might be forced to disappoint the market or the long and variable lags of their monetary policy may begin to bite.

“Current pricing in financial markets appears to be predicated on market expectations of a soft landing in the global economy, and therefore remains vulnerable to negative surprises,” the RBA said.