The Reserve Bank will keep official interest rates unchanged until next year, and then only increase borrowing costs slowly, because record mortgage debt has created a "housing powder keg," Deloitte Access Economics says.
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In a report that also says slowing in the housing market could drag on growth, the consultancy highlights how sensitive many households are to interest rate changes, which will limit sharp increases in the cash rate, now at 1.5 per cent.
Financial markets have in recent weeks questioned whether the Reserve Bank of Australia may follow the lead of foreign central banks such as Canada's and start to signal a return to more normal interest rates.
However, Access said the RBA would only increase the cash rate cautiously in 2018, in line with a forecast pick-up in inflation. It said a "genuine tightening of financial conditions" would not commence until 2019, because the RBA would be wary of squeezing the budgets of mortgage holders.
"Our heavily indebted families are now the Reserve Bank's problem, and that's why – although interest rates will rise in the next few years – they won't rise by all that much," the report said.
"Although we see rates rising, you shouldn't expect a sprint. We're sitting on a housing powder keg."
HSBC economist Paul Bloxham said futures markets were betting the RBA would not hike official rates until mid to late 2018, though he is forecasting a rate rise earlier than that, in the March quarter of next year.
Mr Bloxham said on Monday the very low cash rate was creating "unwanted exuberance" in the housing markets of Sydney and Melbourne, noting that auction clearance rates were still at around 70 per cent in the two biggest cities.
"With the mining downturn now stabilising and global rates lifting, we doubt the RBA will need its very accommodative setting for much longer," Mr Bloxham said.
The Access report said Australians were the second most indebted in the world, relative to their incomes, behind households in Switzerland.
The ratio of household debt to disposable income hit a new record above 190 per cent this month, meaning rates did not need to rise by much before if created "mortgage stress" in inner-city suburbs. Households were three times as exposed to a shift in interest rates as they were in 2000, it said.
"Interest rates are now a massively more potent weapon for slowing the Australian economy than they've ever been before," the report says.
"The Reserve Bank knows that, and so it will be taking baby steps as it increases the cost of capital once again."
Access economist Chris Richardson said in April that house prices in Australia were "dangerously dumb" and that relative to other countries our high house prices were "asking for trouble."
