The Australian Debt Burden and RBA’s Decision

It came at no surprise that the Reserve Bank of Australia slashed its cash rate by another 25 bp to 2% — a new low. The decision is, on the one hand, reasonable considering the country continues to suffer from the weak commodities environment and China’s ongoing economic slowdown. The thin thread the Asian giant has been walking on – cooling down its economy to fight corruption and pass reforms and also showing some initiatives to heat up the economy (e.g. PBOC reduced its RRR (reserve requirement ratio) to allow banks to lend more) – hasn’t made things easy for the Australian economy.

On the other hand, RBA should also consider the high housing prices, which are partly due to low interest rates.

Source: FRED

Also, another thing to consider is the ongoing rise in the debt of households. As you can see, the debt ratio has risen in the past three years after long term yields tumbled down. And even though yields rallied during the second half of 2013; they have come down since then, partly driven by the low RBA’s cash rate.

In the past, LT yields and household debt seem to have moved in similar direction. But this has changed in the past couple of years and now it seems that low yields coincide with higher debt.

So if RBA maintains its low cash rate and it will lead to low yields. This could also further drive more people to take more loans and thus raise the debt burden of households. For a country that could see lower growth in the near term, this could be a problem, down the line.

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