APRA maintains current macroprudential policy settings

APRA has decided to maintain its current macroprudential policy framework, retaining the mortgage serviceability buffer at 3 percentage points and the countercyclical capital buffer at 1% of risk-weighted assets. The decision reflects APRA’s commitment to ongoing review, allowing adjustments to respond to emerging economic and financial risks or to support the economy as necessary.
As a reminder, APRA’s macroprudential policy’s objective is to mitigate financial system risks, ensuring it can sustainably supply credit and payment services for stable economic growth. APRA’s framework, published in 2021, outlines objectives, toolkits, and implementation processes. The authority considers a range of indicators and qualitative information, consulting with the Council of Financial Regulators (CFR) to set macroprudential policy in Australia. Regular reviews and ongoing CFR consultations characterize APRA’s commitment to adapt its policies in response to evolving economic and financial landscapes.
In light of economic uncertainties, geopolitical tensions, and cost-of-living pressures, APRA underscores the prudence of sustaining the 3 percentage point serviceability buffer. This buffer serves as a crucial contingency against unforeseen changes in borrowers‘ financial circumstances throughout the loan’s tenure. Despite cost-of-living challenges, the current buffer level has proven effective in upholding lending quality. Borrowers, especially those transitioning from fixed to variable rate mortgages, have weathered rising mortgage rates due to the applied buffer at the loan’s outset.
While households have coped with financial pressures, including reduced discretionary spending, APRA notes easing conditions in the labor market. The decision to maintain the serviceability buffer at 3 percentage points is justified by expected lower household income growth and the potential for increased borrowing costs, ensuring new borrowers have adequate capacity to manage loan repayments amid deteriorating financial circumstances.
The serviceability buffer, coupled with higher borrowing rates, has contributed to improved loan quality without unduly constraining housing credit. Despite a slowdown in credit growth, housing prices have rebounded to early 2022 levels, influenced partially by constrained supply. APRA emphasizes close monitoring of the relationship between housing prices and credit.
Housing loan refinancing has surged, driven by borrowers seeking better deals and banks offering substantial discounts. Despite this, some borrowers face challenges, attributed to serviceability criteria or changes in personal financial circumstances. Banks retain flexibility in applying exceptions to the serviceability buffer within their risk appetite.
APRA also maintains the CCyB at 1% of risk-weighted assets, citing stabilized credit growth and the absence of emerging stresses compromising banks‘ credit supply capacity. The resilience demonstrated in recent bank stress tests further supports the decision not to raise the CCyB at this juncture.
Persistent inflation adds uncertainty to the economic outlook, with high services price inflation fueled by growing labor costs. Risks of higher inflation persist, driven by geopolitical tensions affecting energy prices. Potential increases in borrowing rates pose additional strains on households and businesses.
Businesses, particularly in the construction sector, face financial pressures due to rising costs and slowing demand. Business credit has decelerated, and insolvencies have increased. Commercial real estate valuations in certain segments have declined, though current exposures pose no significant risk to the banking system. Global policy and economic uncertainty contribute to financial market volatility, especially in longer-term sovereign bond yields. Prolonged restrictive monetary policy in advanced economies may result in fiscal policy tightening, impacting global growth.