Household debt-to-income ratio at all time high causing problems for the RBA

Australia’s economy said to be among the most vulnerable to the rise in global interests rates according to the the Bank for International Settlements (BIS).

The Reserve Bank of Australia is currently facing issues regarding raising interest rates from the current 1.5% as household debt raises 3% in 2016 to an all time high of 189%. As the expansionary policy of cutting interest rates since the mining boom has boosted consumption (C) in the short-term, it is expected that (C) and (I) will both slow  in the long term since the quarter after quarter interest rate cuts comes to a halt. It is expected that if interest rates were to rise now, it would have very damaging affects on the Australian economy due to the high indebtedness ratio and the already falling levels of (C).

As the major end of the housing boom is expected to end in coming months, consumption and investment levels fall as consumers scramble to pay off their loans, and monetary policy has reached its limit, we will likely see a decline in GDP and therefore economic growth in the coming months.

Australia is not alone, with Sweden, Switzerland and Canada facing similar issues. The BIS predicts the high indebtedness of these nations, makes them more a lot more vulnerable to a financial crisis.

http://www.smh.com.au/business/the-economy/bis-sounds-debt-warning-as-australian-household-debt-hits-alltime-high-20170625-gwy0rq.html

 

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5 Comments

  1. It is truly alarming how vulnerable we are to a financial crisis, should one arise. We can only hope that the housing bubble deflates relatively gently, and economic growth remains positive. At the very least this illustrates clearly the excessive optimism in the government’s surplus projections in the medium term, as we can hardly enjoy high wage growth and economic growth in a contractionary or ressesionarry period in the economic cycle.

    Liked by 1 person

    1. I agree, it seems like we are vulnerable to a financial crisis, and the trend in recent years by the government has been overly optimistic economic parameter projections, which isn’t a good thing for Australians. If cutting interest rates continually results in minimal changes to consumption and investment, we need a longer term solution to solve these issues, it looks very concerning at the moment

      Liked by 1 person

  2. Does that mean in one year it rose by 3% to 189%? Or it rose from 3% to 189%?? The latter sounds kind of unrealistic but i dont know thats how I first understood it as.

    Liked by 1 person

  3. cutting interest rate is a good way to boost consumption, but in the long term, with the large consumption, there might be inflationary pressures exist.

    Liked by 1 person

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