Michele Bullock: How are households placed for interest rate increases?

Speech by Ms Michele Bullock, Deputy Governor of the Reserve Bank of Australia, at the ESA (QLD) Business Lunch, Brisbane, 19 July 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you for the opportunity to speak with you today. It was only nine months ago that I was speaking about the risks emerging in a very buoyant housing market. Funding costs and interest rates were at historic lows, housing prices were growing at a fast pace, and concerns were centred on the potential macro-financial risks stemming from high and rising levels of household debt. To address the building systemic risks, the Australian Prudential Regulation Authority (APRA) had announced an increase in the interest rate buffer that it expected banks to use in assessing potential borrowers.

Since then, there have been a number of developments. The economy has turned out to be very resilient. Once pandemic-related restrictions were removed, the economy rebounded strongly. Consumption of services has grown and demand for goods has held up. The labour market is tight with the unemployment rate at multi-decade lows and vacancies at historical highs. As in many other countries, inflation in Australia has risen and it is now higher than it has been since the early 1990s. Global factors, such as COVID-19-related supply disruptions and Russia's invasion of Ukraine, account for much of this increase. But domestic price pressures have also been building. Together, this has contributed to the highest rate of core inflation for many years.