How well placed are households for interest rate increases

Abstract

As in many other countries, inflation in Australia has risen quickly over the past 18 months and is now higher than it has been since the early 1990s. In response, the Reserve Bank of Australia (RBA) Board has been withdrawing the extraordinary monetary policy stimulus that was put in place during 2020 to support the Australian economy through the economic effects of the pandemic. One of the areas the RBA will be closely observing as it tightens policy is how households respond to the combination of rising interest rates and prices. This article deals with the implications of rising interest rates for the household sector with a focus on the implications for financial stability. In doing so, the article will chiefly focus on indebted homeowners since such households pose a greater direct risk to the financial sector than those groups for whom there are also implications such as renters and those who own homes outright. Therefore, an understanding of the impacts of higher interest rates on indebted households is directly relevant to gauging how the economy and the financial sector might be affected.