SYDNEY Feb 22 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
"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
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)