After Cutting Rates, RBA Tells Banks Not to Be Overly Cautious
After Cutting Rates, RBA Tells Banks Not to Be Overly Cautious
(Bloomberg) --
Australia’s central bank joined the government in warning lenders not to be too strict when assessing borrowers, fearing such caution could dent an already slowing economy.
“It is important that banks are not overly cautious in the implementation of current lending policies,” the Reserve Bank of Australia said in its semi-annual Financial Stability Review released Friday. “Lending always entails a degree of risk but excessive risk aversion by financial institutions can curtail the provision of credit that facilitates economic growth.”
Australia’s major banks have tightened lending assessments over the past two years to meet regulatory action on responsible lending and after sharp criticism from an inquiry into financial services’ misconduct. With the economy slowing, the concern from government and businesses is that banks have become too cautious.
Central bank governor Philip Lowe has cut interest rates three times this year to a record low of 0.75% and said he’s prepared to loosen again. That’s a switch from the focus on financial stability that defined the start of his tenure three years ago, with the latest move coming just weeks after he warned peers at the Jackson Hole symposium that easier monetary conditions will “push up asset prices, which brings its own set of risks.”
The RBA’s latest comments come despite increasing signs housing markets in the nation’s largest cities are beginning to take off again. After nearly two years of falls, property prices have risen 3.5% in Sydney in the past three months, spurred by interest rate cuts, a loosening of regulatory lending restrictions and the re-election of Scott Morrison’s government, which killed off opposition plans to shutter tax breaks for property investors.
The Aussie dollar was little changed, trading at 67.50 U.S. cents at 1:13 p.m. in Sydney.
Six months ago in the previous Financial Stability Review, the RBA’s concern was about the risks of further sustained home price declines. Those worries have receded though not disappeared, the RBA said, noting that the ratio of non-performing loans now exceeds the highs seen in the aftermath of the global financial crisis.
The RBA also flagged “potential risks” further out if a lack of housing supply combined with population growth was to push property prices higher quickly. It noted signs of a recent pickup in the number of housing loan applications and approvals.
Household debt in Australia is already around 190% of income, one of the highest ratios in the world, something the central bank again flagged as a key risk to the economy due to the potential drag on consumption.
The central bank also cited the potential for external shocks -- such as the U.S.-China trade war, an escalation of tensions in Hong Kong or a disorderly Brexit -- to hit the economy. Uncertainty over the outlook for global economic growth has increased since its last stability review, it said.
Overall, Australia’s financial system “remains resilient and its ability to withstand shocks continues to build,” the RBA said. Capital holdings at the major banks are “comfortably inside the range needed to withstand the magnitude of shocks associated with most historical banking crisis internationally.”
To contact the reporter on this story: Emily Cadman in Sydney at ecadman2@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Peter Vercoe, Victoria Batchelor
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