Australian households among the most vulnerable to global interest rates rise

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Properties can be seen along the coastline in the Sydney suburb of Clovelly, Australia, July 19, 2015. Reuters/David Gray

The Bank for International Settlements has warned that Australia is now threatened by its huge run-up in household debt. The Swiss-based central bank of central bankers said that high household debt amassed in the past years, leaving Aussie households among the most vulnerable to global interest rates rises.

According to the Reserve Bank of Australia, the nation’s household debt-to-income ratio has gone to an all-time high of 189 percent. The BIS pointed out high risk in several economies because of high debt levels amassed during a time of low interest rates.

BIS head of monetary economics Dr Claudio Borio said the potential weakness in consumption is raised by high debt levels and manufacturing financial cycles. He added that expansion has been consumption-led in several economies and based on empirical evidence, the expansions are less sustainable.

“Our analysis suggests that a number of economies where household debt is historically high can be vulnerable, especially should interest rates rise considerably,” the Sydney Morning Herald quotes Borio as saying. The BIS was among the institutions that anticipated the risk of a global financial crisis many years before it took place.

Australia joins other generally commodity-exporting nations that have experienced a credit boom following a global financial crisis, amassed in a bid to keep up with the house prices. Along with Switzerland, Sweden and Canada, Australia’s household debt reached 2 to 3 percentage points last year based on the BIS report. "Increases in interest rates beyond what is currently priced in markets could weaken consumption considerably," the report further reads.

The BIS listed four major risks that could prevent economic growth. These are continuous weakness in corporate investment, risk of an inflation breakout, the danger of increased protectionism and a shift away from free trade. Another key risk is a warning about high debt levels in "a number of smaller advanced economies and emerging market economies.”

The BIS noted that the nation’s household debt servicing burden has become over 2 percentage points higher than its long-run average. It is expected to rise by 4 percentage points. This compares with the United States, where the repayment burden has gone below average levels.

The bank said the other risk to Australia is China, the country's biggest trading partner. The latter’s debt figures have gone in the red zone, prompting crises in more than two-thirds of occasions. If a crisis occurs, the hit to Australia's national income might pull it into recession.

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