Analysis: RBA Rate Cut Resistance on Leveraged Loans Rise Amid Low Rates

• Published on
• 07 Feb 2020, 09:15 AM

By Sophia Rodrigues

High household debt was always the Reserve Bank of Australia’s main concern when it came to lowering interest rates. But for the first time, the RBA is alert to the risk of low interest rates driving excessive corporate borrowing.

This is one of the main reasons Governor Philip Lowe signalled a resistance to lowering the cash rate further at the speech on Wednesday.

One line in the speech sums up Lowe’s thoughts.

 “We will continue to watching borrowing, in particular, very carefully.” The emphasis is on “very carefully.”

Lowe made this comment when he talked about the risk of low interest rates encouraging too much borrowing and driving excessive asset valuations.

The RBA is alert to this risk playing out in the housing market if households take advantage of lower interest rates to buy property at a time when housing prices are rising strongly.

But apart from borrowing in the housing market, there is also another huge market where low interest rates could have a big impact. This is corporate borrowing.

Within corporate borrowing, the focus is on highly leveraged loans which are lent to riskier borrowers who already have a lot of debt or poor credit history.

Globally, central banks are raising red flags about leveraged loans because of strong growth in recent years, and loosening standards.

In Australia, there has been strong growth in non-bank lending after Australian banks tightened their lending standards following the Royal Commission. There are concerns that increased competition among non-bank lenders and a chase for yield could result in risker loans with higher debt multiples or lighter covenants.   

(I will have more on this topic in part 2 in the next few days)

--Contact: Sophia@centralbankintel.com