The Australian Prudential Regulation Authority (APRA) has opted to maintain its current macroprudential policy settings following a thorough review of both domestic and international financial conditions. This decision underscores APRA’s commitment to mitigating risks to financial stability and ensuring a secure environment for households and businesses to engage in borrowing, saving, and investing.
In justifying the decision to keep its policy settings unchanged, APRA highlighted the considerable levels of household debt and an above-average growth in total credit, which is expected to continue to rise as interest rates decrease. While lower inflation and interest rates have alleviated financial pressures on borrowers, there remains a heightened risk of economic shocks driven by an uncertain geopolitical landscape.
Key confirmations from APRA include:
– The mortgage serviceability buffer will remain at 3 percentage points.
– The countercyclical capital buffer will stay at its default level of 1 per cent of risk-weighted assets.
Chair John Lonsdale remarked that the current buffer level has not hindered new credit access for the household sector. He noted, “Over recent months, we have seen credit continuing to flow to different borrower segments, including to first-home buyers. Declines in inflation and interest rates have eased financial pressures on borrowers and increased borrowing capacity for new borrowers, and lending standards remain sound.”
However, Lonsdale emphasized the potential risks ahead, stating that a significant drop in interest rates, coupled with a strong labour market, could lead to elevated credit growth, rising house prices, and riskier lending practices, such as higher debt-to-income ratios and increased investor lending.
He remarked, “The potential for a recurrence of these trends is something both APRA and the Council of Financial Regulators are carefully monitoring. High household debt is a key vulnerability in our financial system, which has more exposure to residential mortgages than any comparable country.”
While lending standards currently appear robust, Lonsdale urged a forward-looking approach, preparing for potential risks that may arise in the financial cycle. APRA has updated its prudential standards on credit risk and is set to engage with regulated entities to discuss the implementation of various macroprudential measures, should they be necessary. These measures may include limits on high debt-to-income lending and restrictions on new investor or interest-only loans.
