Australia’s central bank cautions that borrowers and businesses may face another challenging year ahead.

The Reserve Bank of Australia (RBA) anticipates another challenging year ahead for households and businesses, suggesting limited relief in interest rates in the coming months. However, the RBA emphasized the well-capitalized status of the banking sector to absorb potential losses from increasing arrears. In its semi-annual Financial Stability Review, the RBA underscored the resilience of households, businesses, and banks amidst record-high interest rates and significant inflation. The RBA stated that conditions would remain tough for many Australian households and businesses throughout the year, a sentiment reiterated throughout the 39-page review. Household budget pressures influenced the RBA’s decision to keep interest rates unchanged for the third consecutive meeting and to abandon its tightening bias, although definitive policy decisions remain pending. The RBA highlighted that approximately 5% of borrowers with variable-rate mortgages are experiencing expenses surpassing their incomes. While an anticipated half-percentage-point rise in the unemployment rate could lead to cash flow shortages for most affected borrowers, the RBA noted that it wouldn’t necessarily result in mortgage defaults. Fortunately, recent data revealed an unexpected decrease in the unemployment rate to 3.7% in February, down from the previous month’s two-year high of 4.1%.