Deutsche Bank’s argument is hawkish at heart. If each hike does less damage to household cash flow than in the past, the RBA may need to do more to slow demand, which keeps a fifth hike in November in play and supports the short end of the Australian yield curve. That would also lend some support to the Australian dollar against currencies where central banks are closer to the end of their tightening. The risk to this view comes from asset prices. A deeper housing slump or a sharp correction in global AI stocks, both flagged in RBA staff work, would test whether balance sheets are as robust as they look. With oil above $100 keeping inflation pressure elevated, the RBA has little room to give households the benefit of the doubt.
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Earlier:
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Australian households look tougher than their debt suggests, which is good news for borrowers but may mean the Reserve Bank has to push harder to cool spending.
Summary:
- Deutsche Bank says Australian households are more resilient to RBA rate hikes than expected, despite high debt
- Its macro strategist estimates the household debt-to-asset ratio is at its lowest since 1997, with asset growth strong and debt-to-income stable
- The cash-flow effect of monetary policy appears weaker than over the past decade, the bank says
- RBA staff papers reported by Bloomberg this week warned that falling house prices and a possible AI stock correction could weigh on spending
- The RBA’s next decision is due on 3 November, with the big four banks split on whether a fifth hike follows
Australian households are coping with higher interest rates better than their heavy debt load would suggest, according to Deutsche Bank, offering a counterpoint to growing concern that rate hikes and falling asset prices will drag down consumer spending.
Lachlan Dynan, macro strategist at Deutsche Bank, said improving household balance sheets were helping borrowers absorb tighter policy. Household asset growth has remained strong and the ratio of debt to income has stabilised, he said, estimating that household debt relative to assets is now at its lowest level since 1997. He added that the cash-flow channel of monetary policy, through which higher rates squeeze disposable income, appears weaker than it was over the past decade. Broader balance-sheet strength, not just housing, may help offset wealth losses from weaker house prices, according to Dynan.
The view sits in contrast to internal RBA documents reported by Bloomberg this week. Those papers estimated that a permanent 20% fall in AI stocks could cut long-run consumption by around 2.5% if losses spread to wider equities, on top of a hit from falling house prices. Bloomberg Economics estimates around A$510 billion of housing wealth has been lost since late March.
The RBA’s own assessment leans partly toward Deutsche Bank’s view. In its Financial Stability Review on 1 October, the central bank said most mortgage-holding households remain well placed to manage tougher conditions, even if house prices were to fall sharply, although it noted pockets of stress.
The debate matters for the policy outlook. Dynan argued last month that it was possible to be bearish on housing and still expect the RBA to keep tightening, because a larger housing downturn may be needed to bring the overall economy into balance. If households are less sensitive to each rate increase, the central bank may need to do more to slow demand.
The RBA raised its cash rate to a 15-year high of 4.6% on 29 September, its fourth increase this year, as oil prices above $100 a barrel added to inflation pressure. Variable mortgage repayments will rise from 9 October to reflect that move.
The next decision is due on 3 November at 2:30 pm AEDT (03:30 GMT), ahead of September-quarter inflation data on 28 October. The big four banks are reported to be evenly divided on whether a fifth hike, to 4.85%, will follow.
This article was written by Eamonn Sheridan at investinglive.com.