What the RBA's Financial Stability Review says about money in Australia right now

Global volatility, higher inflation and interest rates, plus cyber-attacks and climate change are all affecting Australia’s financial stability. The new report from the Reserve Bank of Australia (RBA) looks at the risk these factors and more pose to the nation’s economy, but what can you do about their effect on your household bank accounts?

What is the report and what does it do? 

The Financial Stability Review provides the RBA's assessment of the current condition of the financial system and potential risks to financial stability. The Review is issued half-yearly, in April and October.

What are the main factors affecting Australia’s financial stability? 

Global risks

Australia isn’t the only country around the world that’s staring down the barrel of high inflation. In response, central banks around the world have been raising interest rates, leading to housing price growth slowing or even reversing.

At the same time, financial asset prices have sharply declined and volatility has increased, while severe disruptions in energy markets have led to stress in some parts of the global financial system, including Europe.

With regions around the world facing rising economic uncertainty, global financial conditions could tighten further in the period ahead and test the resilience of some households and businesses.

Higher inflation and interest rates

The RBA has been quite clear about its intention to bring Australia’s inflation rate from its forecast high of 7.75% at the end of 2022 down into the target band of between 2% and 3%. To combat the “scourge” of high inflation, the RBA has rapidly raised the national cash rate from a record low of 0.10% in April 2022 to 2.60% in October 2022.

Raising the cash rate has in turn raised interest rates around Australia as banks and lenders pass the hikes on to customers. While this has allowed some savers to earn more interest on their savings accounts and term deposits, it’s also put more pressure on Australian homeowners as variable interest rates on mortgages rise and fixed rate terms expire.

The RBA affirms that income growth has not kept up with inflation in Australia, despite a strong labour market. This could force households to reduce their spending and/or their rate of saving to service their debts, putting borrowers with lower savings and high debt at higher risk of payment difficulties. This could potentially become even more challenging if unemployment and other economic conditions turn out to be worse than expected and housing prices fall sharply.

This all means that housing loan arrears rates are likely to increase in the period ahead from currently very low levels.

Businesses are reportedly being affected by rising rates much like households. While many have benefited from the strong economic recovery and entered the interest rate tightening cycle in a healthy financial position, others have been particularly affected by sharp rises in costs, labour shortages and supply disruptions - especially the construction industry.

Cyber-attacks and climate change

The recent Optus data breach has demonstrated the risk that cybercrime poses to Australian businesses and their customers. Future cyber events could undermine confidence in the financial system, requiring financial institutions, governments and regulators to work together to manage these risks.

Climate change is another systemic threat to Australia’s financial systems, as well as to Australian communities. Financial institutions are vulnerable to direct losses on assets from climate events and risks stemming from the transition to a lower emissions economy, according to the RBA. While these institutions are taking action to manage some of these risks, it will take time for these adjustments to come into effect.  

What can you do?

Depending on your financial situation, there are several options you could consider to help you manage the risk to your household finances. The best options for you will depend on your situation and personal goals – consider contacting a financial adviser or mortgage broker for advice on the choices that may best suit your needs.

Build and maintain your savings buffers

If you haven't done so already, building up a financial buffer in a savings account or term deposit could help to insulate you from future financial risks. Even if money is tight, every little bit could potentially help.

Holding this money in your savings account or term deposit could help you to grow your wealth by earning interest on your savings. You could also consider depositing money in the offset account for your home loan, as this could help you pay less interest and pay off your property that little bit faster.

Keep on top of your repayments

While the cost of interest charges on home loans and other debts may be on the rise, late or missing repayments could lead to credit problems in the future. If it’s looking like there’s a risk you could default on your mortgage or any other loan, rather than ending up with a default on your credit file that could affect your credit score, consider contacting the lender ahead of time to work out what options may be available to you.

Switch and save

As your personal financial situation changes, your current providers may no longer be fit for their purpose. There are alternative options available for almost every financial product or service provider out there, from home loans to car loans and credit cards to car and home insurance, energy, phone and internet providers. Comparing other options could help you find more affordable choices that may also better fit the needs of you and your household.

Protect your personal data

Checking and upgrading the security on your finances and other digital accounts and services could help to protect you in case of future data breaches and hacks.

It may also be worth checking your credit score and keeping a close eye on your credit file. If you spot any errors or unusual activity, you can quickly take steps to contact the parties involved and protect your finances and credit history.

Go green

Taking steps to make your household greener could not only benefit the environment and affect your energy bills, but could potentially affect the future value of your property. Additionally, as more governments move away from petrol-powered vehicles and roll out more charging infrastructure, electric vehicles (EVs) and hybrids could soon become more affordable.

If the cost is a barrier to going green when it comes to your home or car, there are options available to consider, including green home loans, green personal loans, and green car loans. These options may have lower rates and fees than some other options, as long as they’re used to pay for green projects, products and services.  

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