MELBOURNE (S&P Global Ratings) May 3, 2022--Australian federal and state governments and the country's banks remain resilient to rising interest rates, S&P Global Ratings said today. In its monthly review of the target cash rate today, the Reserve Bank of Australia (RBA) increased the official cash rate by 25 basis points from a historical low 0.1%. Further increases in the cash rate in Australia remain likely in the face of Consumer Price Index headline inflation running at 5.1% for the 12 months to March 31, 2022, the highest in the past 20 years. Further, the "underlying" inflation rate at 3.7% is also above the RBA's target range of 2%-3%.
A rapid rise in interest rates could trigger a sharp fall in property prices, which could escalate bank credit losses. In our base case, however, we expect house prices to remain either flat or show only modest falls in the next year. This is in line with our forecast for the cash rate to increase to 0.50% by Dec. 31, 2022, and further to 1.50% by the end of 2023. Continued low unemployment should also support house prices, in our view
Borrowing costs should remain manageable for the Commonwealth, at about 3% of revenues in 2022, notwithstanding rising interest rate conditions. In contrast, government interest payments were about 8.5% of revenues in the mid-1990s and about 10% in the late 1980s.
We consider that the Commonwealth and state governments of Australia can absorb the likely interest rate rises without this weighing significantly on their operating balances or debt burdens. The debt levels of the Commonwealth government and most states are running at all-time highs. Nevertheless, debt servicing remains manageable. We forecast government interest expenses to slowly increase to operating revenues during the next two years for three reasons. First, most governments issue fixed-rate bonds, or hedge most interest rate risks. Second, despite rising interest rates, governments are likely to refinance maturing debt that was issued prior to the pandemic at lower interest rates in the immediate future. Third, the operating revenues of governments will improve as the economy recovers after being suppressed during the pandemic.
Australian banks' gross earnings should benefit from rising interest rates--as is typically the case for the banking industry globally. Bank interest margins have been depressed in recent years, largely due to low interest rates. We consider that if the official cash rates increase, banks are likely to reprice their assets ahead of a commensurate increase in their borrowing costs. Conversely, banks' credit losses are also likely to increase as interest rates rise. In particular, the most highly leveraged households will struggle to service their debt at higher interest rates. Nevertheless, we consider that the rise in defaults and credit losses will only offset part of the improvement in banks' gross earnings. We believe that the banks have been disciplined in assessing borrowers' debt serviceability at interest rates that include a 3% serviceability buffer. Furthermore, highly leveraged households, who will face distress due to increased interest rates, a rising cost of living, and flat wages, form only a small proportion of the banks' loan books.
This report does not constitute a rating action.
AUSTRALIA
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
| Primary Credit Analysts: | Anthony Walker, Melbourne + 61 3 9631 2019; anthony.walker@spglobal.com |
| Nico N DeLange, Sydney + 61 2 9255 9887; nico.delange@spglobal.com | |
| Secondary Contacts: | Martin J Foo, Melbourne + 61 3 9631 2016; martin.foo@spglobal.com |
| Lisa Barrett, Melbourne + 61 3 9631 2081; lisa.barrett@spglobal.com | |
| Rebecca Hrvatin, Melbourne + 61 3 9631 2123; rebecca.hrvatin@spglobal.com | |
| Sharad Jain, Melbourne + 61 3 9631 2077; sharad.jain@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.