RBA Says ‘Buffers’ Shield Households From Global Risks: Economy

Australian households are building a financial cushion by repaying mortgages faster and saving more, while businesses are indicating renewed willingness to borrow, the nation’s central bank said.

“Given the large share of households with mortgage prepayment buffers, along with relatively low unemployment and moderate income growth, most households appear well placed to meet their debt obligations,” the Reserve Bank of Australia said in its semiannual financial stability review released in Sydney today.

A slowdown in mining that helped secure 21 recession-free years in Australia has heightened focus on risks to an economy where consumers took on more debt than Americans at the height of the mortgage bubble. Policy makers have signaled confidence they have the tools to cope with any external turbulence: Australia has the highest benchmark interest rate among major developed nations and the government has pledged to return the budget to surplus.

The report underscores that Australian households have “a decent shock-absorber there in case there is a loss of income,” said Ben Jarman, a Sydney-based economist at JPMorgan Chase & Co. “For those who are extremely downbeat on the prospects for the economy, it’s a little bit of a pushback for that group.”

‘Appetite for Debt’

The RBA said business credit grew at an annual pace of 6.5 percent over the six months to July after declining for most of the prior three years, indicating companies’ “appetite for debt may be starting to recover.” Even so, the central bank said overall credit growth will probably remain “fairly subdued for some time” due to weak demand, and banks may struggle to achieve the profit growth they’ve been used to in previous decades.

“In this environment, it would be undesirable if banks responded by loosening their lending standards or imprudently shifting into new products or markets in a bid to boost their balance sheet growth,” the RBA said.

Commonwealth Bank of Australia, Westpac Banking Corp., Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. -- the so-called four pillar lenders for a law that prevents them from buying each other -- reported a 1 percent increase in profit to about A$11 billion ($11.5 billion) for their latest six-month results from the same period a year earlier, after adjusting for the effect of a large, one-time tax benefit in 2011, the RBA said.

Consumer Borrowing

Australia’s consumer borrowing stood at 149.7 percent of disposable income in the first quarter, compared with a record 156.3 percent in 2006, RBA data show. That’s higher than the 133 percent Americans accumulated at the peak of the U.S. subprime mortgage boom, according to the Federal Reserve Bank of San Francisco.

“With aggregate indebtedness still around historically high levels, a continuation of the recent borrowing restraint would help strengthen the financial resilience of households,” the central bank said.

About half of home-loan borrowers are ahead of schedule on their mortgages, the RBA said, citing various data sources. That’s “high compared with many other countries” and comparable to Canada’s repayment rate, it said.

Asia’s benchmark stock index swung between gains and losses today. The MSCI Asia Pacific Index was little changed at 123.20 at 12:04 p.m. in Tokyo. Australia’s dollar held losses from yesterday, trading at $1.0442 at 1 p.m. in Sydney.

South Korean consumer confidence held at a seven-month low in September and the government said it plans to cut its fiscal deficit to 0.3 percent of gross domestic product next year. A Thai report may show that exports fell 5.8 percent in August from a year earlier, according to a Bloomberg survey. Hong Kong releases trade data for August.

Draghi Address

In Berlin, European Central Bank President Mario Draghi is scheduled to speak at an event organized by the Federation of German Industries.

In the U.S., consumer confidence may have climbed in September from a nine-month low. The S&P Case/Shiller index will report on home prices in 20 U.S. cities for July.

A GfK SE report on German consumer confidence may hold steady in October, according to a Bloomberg survey, UBS AG will report a gauge of Swiss consumer demand for August and France will release business confidence figures for September.

Australians’ savings rate has averaged about 9.5 percent of disposable income in recent years, above the level five to 10 years ago. The RBA said consumers’ caution has partly been motivated by a desire to rebuild wealth as real net worth per household declined by 11.5 percent from its 2007 peak, much of that reflecting a fall in house prices.

Risk Aversion

Households have also reduced their exposure to the share market as they become more risk averse, the RBA said. The share of households’ financial assets held in equities, excluding pension plans, dropped to 8.5 percent in March from 18 percent in 2007. In contrast, the share of deposits has risen to 25 percent from 18 percent over the period, the RBA said.

Australian banks have become more dependent on deposits, which account for 53 percent of lenders’ funding, up from about 40 percent in 2008, the central bank said.

“While the Australian banks have little direct asset exposure to the most troubled euro-area countries, they remain exposed to swings in global financial market sentiment associated with the problems in Europe,” the RBA said. “They should be more resilient to such episodes though, given the improvements they have made to their funding.”

Investors are showing concern that Australia’s economy may slow after the price of iron ore, which made up more than 20 percent of exports last year, dropped as much as 37 percent this year to the lowest level since October 2009.

Projects Shelved

Fortescue Metals Group Ltd., Australia’s third-biggest producer, cut its spending plans by 26 percent as iron-ore prices declined. BHP Billiton Ltd., the world’s largest miner, delayed work at the Olympic Dam copper-uranium-gold project in South Australia last month, joining companies including Xstrata Plc and Rio Tinto Group in scaling back expansion.

Australia’s central bank lowered borrowing costs by a total of 50 basis points late last year and a further 75 basis points in May and June to help shield the economy from Europe’s debt crisis and slower growth in China. It held the rate at 3.5 percent at the past three meetings as European policy strived to end the three-year malaise.

Traders are pricing in a 78 percent chance that the RBA will cut borrowing costs by another 50 basis points by year end to 3 percent, matching the 50-year low the benchmark reached at the height of the global financial crisis. They see an 82 percent chance it will lower the overnight cash rate target by a quarter percentage point at the Oct. 2 policy meeting.

The RBA also said the International Monetary Fund has conducted a Financial Sector Assessment Program review that confirms “Australia has a stable financial system, with robust financial regulatory supervisory and management frameworks.” The report, due out later this year, included stress tests that showed domestic banks would likely withstand a severe economic shock, the central bank said.

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