Philip Lowe, Governor of the Reserve Bank, stated that recent public scrutiny of banks, led by the ongoing Royal Commission will result in tighter lending policies, and eventual increases in interest rates.

Lowe suggested that mortgage lending standards will get more restrictive when he spoke at the Reserve Bank Board Dinner in Adelaide, last Tuesday. This was just hours after the Reserve Bank had announced that the cash rate would remain unchanged for the 19th consecutive monthly period.

“Domestically, for some time, we have seen the main risk to be related to household balance sheets. For a while, trends in household credit were quite concerning,” he said.

“On this front, things now look less worrying than they were a while back, although the level of household debt remains very high, which carries certain risks. The possibility of tightening Australian financial conditions was also discussed in relation to financing. The US has seen an increase in US dollar funding costs, but this is not directly linked to monetary policy. This increases are reflected in higher Australian money market rates.

“We expect some of this to be reversed in time, although it is difficult to tell by how much and when. In the context of current public scrutiny, it is possible that Australia’s lending standards will be further tightened. We will continue to watch these issues carefully.”

Late April saw the Australian Prudential Regulation Authority announce that lending standards have improved significantly since the 10% cap placed on the growth of new loans to property investors in 2014. APRA stated that it is ready to lift the cap on lenders who can demonstrate stronger lending standards.

The regulator is working now with ADIs in order to address the debt-to-income risk, which has been repeatedly highlighted by the Reserve Bank over the past twelve months.

Lowe also addressed the issue of monetary policy in his speech, noting that while it may look as if the Reserve Bank has little to do when it meets on the first Tuesday of every month, the board actually “diligently [assesses] the pulse of the Australian economy”.

“We also deliberate carefully over what setting of monetary policy will best deliver low and stable inflation in Australia. As we conduct those deliberations, we are conscious that our ultimate objective is enhancing the economic prosperity and welfare of the Australian people,” he said.

Lowe claimed that Australia’s economy is in a better place than it was last year. There has been significant progress in reducing unemployment, and inflation returning to the target range. The Reserve Bank anticipates that there will be more progress in these areas in the future.

“The other key point is that the progress we are making is only gradual: our central scenario is for a gradual pick-up in wages growth, a gradual lift in inflation and a gradual reduction in the unemployment rate,” Lowe said.

“While we might like faster progress, it is encouraging that things are moving in the right direction and are likely to continue to do so. If this is how things turn out, it is reasonable to expect that the next move in interest rates will be up.”