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Reserve Bank warns against households’ ‘reduced appetite for debt’

“A reduced appetite for debt among households could suggest that they would be more likely to leave their repayments unchanged in the face of lower interest rates,” it said.

Some major lenders are privately reporting they have seen little movement by households to cut their repayments despite the June and July reductions in mortgage rates.

The RBA said while people might resist cutting their repayments, lenders had now made it incredibly easy for people to adjust their monthly mortgage bill.

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“We know that the banks are willing to accommodate good quality borrowers who want to reduce their scheduled repayments,” it said.

“The fact that it is now easier for lenders to communicate with their customers and for customers to accept offers to reduce their repayments – via online banking applications and emails – would tend to make it more likely that borrowers reduce repayments compared with earlier decades.”

Lower interest rates are also aimed at reducing the cost of borrowing for the business sector. There have been some concerns raised that if rates are reduced too low, firms that would ordinarily go out of business would instead survive.

The RBA noted there is some evidence that “zombie” firms have survived in Japan, where interest rates have been close to or below zero for almost two decades.

“To date, there is little evidence that prevalence of zombie firms is an issue in the Australian economy,” it said.

“In Australia, most firms that make losses and become unviable cease operations or are taken over relatively promptly.”

But the bank said it appeared firms were not taking into account the lower cost of borrowing when it came to deciding whether to invest in a new project.

“Information from the [bank’s business] liaison program suggests that required [internal] rates of return for a project to proceed have not come down in line with interest rates over the past decade or so,” it said.

“This suggests that projects that are unviable at ‘normal’ interest rates are in fact not proceeding, and even some projects that would be viable might not be proceeding.”

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