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Record household debt leaves Aussies vulnerable, says RBA governor

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Record-high levels of household debt will leave Australians vulnerable to a global economic downtown, the Governor of the Reserve Bank of Australia Dr Philip Lowe said on Tuesday night.

Speaking at the Committee for the Economic Development of Australia dinner in Melbourne, Dr Lowe hinted that another official interest rate cut was not unlikely.

He also warned against encouraging Australians to take on more household debt.

"It is unlikely to be in the public interest, given current projections for the economy, to encourage a noticeable rise in household indebtedness, even if doing so might encourage slightly faster consumption growth in the short term," he said.

In a speech focused on "securing prosperity" and "managing risk and ensuring resilience" across the banking system as well as at a consumer level, Dr Lowe called on Australians to pay close attention to household balance sheets and strengthen financial buffers.

"These buffers too are important as they influence how households respond to difficult economic times," he said.

"Ideally, in such times, people are able to draw on their savings a bit, and perhaps even access credit, so that they don't have to cut their consumption sharply.

"Of course they can do this only if their balance sheets are in reasonable shape."

Debt levels relative to income are at a record high in Australia, he said, with household debt equivalent to 185 per cent of annual household disposable income. This was up from around 70 per cent in the early 1990s.

"Part of our preparation is to ensure that we have adequate buffers in place to deal with future shocks wherever they come from," he said.

"These buffers provide us with options when challenges arise."

Despite calling for prudence, Dr Lowe said the RBA was not predicting difficult economic times.

"The Reserve Bank's central scenario for the Australian economy remains a relatively positive one."

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Sharyn McCowen is Money's online producer. She has a degree in journalism from Charles Sturt University, and was a newspaper reporter before moving to magazines and finance.
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