By James Glynn


SYDNEY--Higher interest rates have tightened financial conditions across Australia's economy, but the pain is being felt differently between households and business, according to Chris Kent, assistant governor at the Reserve Bank of Australia.

In a speech delivered to a banking conference in Melbourne, Kent added that while demand is rebalancing in the economy, the central bank still has a need to remain vigilant against the danger that inflation gathers renewed momentum over coming months.

"While recent economic data have been mixed, they have reinforced the need to remain vigilant to upside risks to inflation. Hence, with regards to the path of interest rates, the reserve bank board is not ruling anything in or out," he said.

The comments repeat recent warnings from the central bank that have prompted some economists to highlight the risk that interest rates might be raised again, perhaps as early as August if coming inflation data shows no signs of improvement.

In a detailed examination of the impact of the 425 basis-point rise in the RBA's official cash rate since May 2022, Kent said households are feeling a lot of pain, where businesses are being affected depending on their size, level of debt, and earnings growth.

"Financial conditions are particularly restrictive for households, but less so for larger businesses," he said.

"Higher interest rates work through several channels and their effects will vary across different households and businesses according to their circumstances, including their indebtedness and the shape of their balance sheets more broadly," he added.

Estimates of the neutral official cash rate, or the level of the OCR at which aggregate demand is neither expanding or contracting, have risen since the pandemic, Kent said.

At 4.35%, the OCR is currently above most estimates of the nominal neutral rate provided by market economists surveyed by the RBA, he added.

In May, the median estimate among market economists implied that the cash rate was around 1 percentage point above the nominal neutral rate, he said.

"In short, these estimates imply that monetary policy is restrictive and so it is continuing to bring aggregate demand into better balance with aggregate supply, as intended," he added.

The effects of tighter monetary policy are felt most directly by the roughly 40% of households with a mortgage, with scheduled mortgage payments having increased to a record 10% of household disposable income, Kent said.

Still, for many medium and large businesses, the effect of higher interest rates has been partly offset by strong nominal earnings, relatively low leverage and, in some cases, debt that was issued at earlier low fixed rates, he added.

"All else equal, this decline in leverage would suggest that monetary policy is having less effect on the average business," he added.


Write to James Glynn at james.glynn@wsj.com


(END) Dow Jones Newswires

06-25-24 1949ET