The RBA’s Financial Stability Review (FSR) pointed to rising financial risks within
the Australian and global economy, which helps explain the RBA reducing its rate
hikes from 50bp increments to 25bp increments. The RBA acknowledges the risks
around the synchronised global tightening in financial conditions for global growth
and asset markets. Australian households’ high debt level (a debt-to-disposable
income ratio of around 180%) also makes them sensitive to interest rates. The RBA
notes that presently, the share of households facing debt servicing pressures is
low because many households entered into the rate hike cycle with significant
liquidity buffers. The liquidity buffers are unevenly distributed, however. The RBA
acknowledges a rise in the unemployment rate alongside rising interest rates, and
prices could see more households become stressed financially, especially if market pricing for a terminal cash rate of 3.80% were realised. The RBA notes that
about 35% of households are on fixed-rate mortgages and two thirds of these
mortgagees will have their rates reset in the coming year. The RBA also expressed
more alertness to the financial conditions faced by Australian business. While the
central bank sees that leverage is low in the sector, businesses that have high
energy cost bases and those still dealing with pandemic disruptions are
experiencing distress. The FSR once again helps emphasise differences in the
situations facing the RBA and the Fed. Households in Australia are more
responsive to central bank rate hikes than households in the US.