February 21, 2017 / 9:31 PM / 6 months ago

Australia's central bank sees risks in high household debt

SYDNEY, Feb 22 (Reuters) - The head of Australia's central bank said on Wednesday the risks of encouraging more borrowing by already heavily indebted households argued against seeking a faster return of inflation to its target band, another sign rate cuts were off the table.

Reserve Bank of Australia (RBA) Governor Philip Lowe said a high and rising unemployment rate might add to the case for more stimulus, but so far the bank was satisfied that the labour market was heading in the right direction.

"We have been seeking to balance the risks from having inflation low for a longer period against the risks from attempting to increase inflation more quickly, which would partly occur through encouraging more borrowing," said Lowe, who has kept rates steady since last easing in August.

While there was a danger low inflation could lead to a self-fulfilling decline in inflation expectations, he did not see "a particularly high risk" of this in Australia.

However, he did see risks in encouraging more borrowing by households where debt to income ratios were already at record highs.

"At some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment," he warned.

"It is difficult to quantify this risk, but it is one that is difficult to ignore."

This is a major reason financial markets have almost priced out the chance of another cut in the current 1.5 percent cash rate following two easings last year.

Lowe noted that high levels of debt combined with subdued wages growth were already making households wary of spending freely, choosing to save more instead.

While some pick up in wages growth was expected, the RBA's liaison with business suggested the upturn was not imminent, he said.

Lowe repeated the central bank's forecast was that economic growth would accelerate to around 3 percent this year and next and that underlying inflation would return only slowly to its long-term target band of 2 to 3 percent. (Reporting by Wayne Cole)

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