MNI INTERVIEW: Households Can Manage Higher Rates-RBA's Harper

Higher interest rates in Australia are unlikely to create significant problems for mortgage serviceability because household assets had grown sharply alongside debt levels, according to Reserve Bank of Australia Board member, Professor Ian Harper.

Harper, the Dean of the Melbourne Business School, was responding to questions from MNI on Australia's vulnerability to recession if interest rates were to rise, given that household debt is at record levels at around 1.75 times disposable annual income.

This week, the RBA outlook was still relatively dovish after Tuesday's board meeting, despite the central bank abandoning the defence of the 0.10% yield target on government bonds maturing in April 2024, see: MNI STATE OF PLAY: Ambiguity On Inflation Clouds RBA Rate View.

"The likelihood of interest rate rises of the magnitude the market is currently forecasting causing a problem for households in servicing their mortgages seems very low," said Harper, expressing a personal view and not that of the RBA.

"While the level of household debt has risen, so has the level of household assets with the result that household debt has also risen, primarily driven by the rise in house prices and equity prices."

INFLATION KEYS

Asked about Australian inflation, and why it was different to inflation in other developed markets such as the US, Harper pointed to flat wage growth in Australia.

Harper said that wages growth, currently travelling at an annualised 1.7% in Australia against third quarter growth of 1.5% in the US, was the major differentiating factor between the two economies and their interest rate outlooks.

"Australia continues to languish and so long as this continues, Australia's experience of inflation is likely to lag that of overseas," he said.

While abandoning the yield target after trimmed mean inflation – the RBA's preferred measure – printed at 2.1% and moved into the central bank's 2% to 3% target range, the bank did not substantially change its interest rate guidance.

RBA Governor Philip Lowe said it was now "plausible" that conditions for a rate rise could appear in late 2023, the RBA did not discount its long-standing view that rates would not rise until 2024.