As economic growth strengthens in many parts of the world, some prominent central banks are switching to a more hawkish policy. This year, the Bank of Canada and the Bank of England joined the US Federal Reserve in raising interest rates from at or near record lows.
Now, some market commentators say the Reserve Bank of Australia (RBA) could be next.
However, we don’t see RBA rates hikes in the next 12-18 months due to two issues with Australian households: record-high debt and record-low wage growth. If the RBA raised rates, we think many households would struggle to make their mortgage payments and would likely scale back on discretionary purchases. And that would likely hurt household consumption, which accounts for nearly 60% of Australia’s gross domestic product (GDP).
Why Australian Households Are Struggling
The RBA didn’t follow the near-zero interest rate policy many other central banks pursued after the 2007–2009 Global Financial Crisis. Instead, the reserve bank cut its benchmark interest rate, the overnight cash rate, to an emergency level of 3% in 2009, before raising it to 4.7% by late 2010. It then gradually cut rates to 1.5% in August 2016, and rates have stayed at this record low level ever since.
In an environment of low interest rates, many Australian households took on debt to buy bigger houses or renovate their existing homes. Australia now has the second-highest household debt-to-GDP level in the world, second only to Switzerland.1 In addition, many of these loans have floating rates that reset every couple years, which would lead to higher mortgage payments in a rising-rate environment.
Australian households have also used lower interest rates to maintain their lifestyles, despite little or no wage growth. According to the Australian Bureau of Statistics, wage growth is at the lowest level on record.2