By SYDNEY (Reuters) – Australia’s banking regulator on Monday said it would retain a 3% serviceability buffer for home loan lending because of high household debt, persistent cost-of-living pressures, a pickup in credit growth and weakening job market.
The Australian Prudential (LON:PRU) Regulation Authority (APRA) said though inflation had continued to moderate and the risk of higher interest rates likely receded, there could be “shocks to household incomes” from a slowing labour market.
“High household debt is a key vulnerability if adverse economic scenarios came to pass. We also have seen an uptick in non-performing loans, with the potential for further rises, especially if unemployment increases,” APRA Chair John Lonsdale said in a statement.
Lonsdale said the risk of financial shocks had persisted over the past year. However, the sources of economic uncertainty have shifted, forcing it to maintain its current macroprudential policy settings.
Under the home loan guidelines, the country’s main lenders are required to assess the ability of new borrowers to meet their loan repayments at an interest rate of at least 3 percentage points above the prevailing home loan rate.
Australia’s employment growth slowed in October after a strong run, but the jobless rate has stayed low and underlying trends remain relatively healthy, suggesting there is little rush to cut interest rates.
The countercyclical capital buffer would remain at 1.0% of risk-weighted assets so that banks have an additional capital cushion for stress situations, APRA said.