Households in Australia and Canada have become more levered since the onset of the global financial crisis eight years ago. Monetary easing by the Reserve Bank of Australia and the Bank of Canada have eased the debt servicing burden on households in these economies, but debt service ratios likely will begin to trend higher once these central banks begin to tighten again. Will higher interest rates choke off growth in consumer spending in these economies?
Rate cuts have restrained rise in debt service burdens: Monetary accommodation has eased debt service burdens for households in Australia and Canada.
Australia: Household susceptible to rising rates: About 90 percent of Australian mortgages are floating rate.
- What happens to the household debt service ratio in Australia when the RBA tightens policy?
- Will the household DSR in Australia shoot higher again?
Real PCE growth could eventually encounter headwinds via a rising household DSR.
Canadian households are less sensitive to rising short-term rates: the household DSR in Canada could easily return to its previous peak.
We do not mean to suggest that growth in consumer spending in either Australia or Canada is in imminent danger. For starters, neither the RBA nor the BoC is likely to start tightening soon. Moreover, growth in consumer spending does not necessarily need to weaken once DSR’s start to increase as central banks tighten. Consumers could bring down their savings rates to finance higher debt service payments and consumption expenditures. However, households in Australia and Canada will eventually become increasingly stressed if they continue to lever up while their central banks tighten policy.
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