Australia's central bank cautions households against over-borrowing when interest rates decline

New Delhi

Australia's central bank has warned borrowers not to take on too much debt when interest rates start coming down and risk a boom/bust cycle, though it judged the financial system remained resilient overall.

In its semi-annual Financial Stability Review, the Reserve Bank of Australia again pointed out the resilience of households, businesses and banks despite decade-high interest rates and painful inflation.

A small but growing share of mortgage holders were starting to fall behind on payments, and an increasing number were making the difficult decision to sell their homes to avoid default.

Still, the share of borrowers in severe financial stress remains small at less than 2 per cent, the RBA said. Of those loans in arrears, 0.5 per cent were also in negative equity.

The RBA expects household budget pressures to ease once interest rates start to fall but also sees dangers in that.

"Domestic vulnerabilities could increase if households respond to any easing in financial conditions by taking on excessive debt," said the RBA in a 45-page review, warning that the risk could be magnified if lending standards drop.

It concluded that, under a wide range of scenarios, most borrowers will be able to service their debt, and by selling their properties to repay their loans and avoid default, the risk to the financial system is limited.

The central bank has kept rates steady since November, deeming a cash rate of 4.35 per cent - up from a record-low 0.1 per cent during the pandemic - restrictive enough to bring inflation within the target band of 2-3 per cent while preserving employment gains.

Policymakers have ruled out a near-term cut in interest rates as they wait for inflation to cool further.