Fear of inflating housing bubbles in Sydney, Melbourne, and Brisbane is stopping the Reserve Bank of Australia (RBA) from cutting interest rates to boost the economy, Governor Phillip Lowe conceded on Wednesday.   

The RBA’s dilemma stems from soaring house prices in the eastern states, which have contributed to high levels of household debt in Australia.  

“We are trying to balance multiple objectives at the moment,” Lowe said at the Australia-Canada Economic Leadership Forum. “We’d like the economy to grow a bit more quickly and we'd like the unemployment rate to come down a bit more quickly than is currently forecast.”

If the RBA tried to achieve these objectives through monetary policy, it would encourage people to borrow more money, which in turn would place greater upward pressure on house prices, Lowe said.

For the time being, the Reserve Bank is committed to leaving the official cash rate on hold at a record low of 1.5%.

Lowe expressed optimism about the current official cash rate, saying it was low enough to spark business investment and stronger economic growth.

“I think there are signs that things are improving in the economy — we’ve seen it in a whole range of business indicators in the last couple of months,” he said. “So the hope is that the current setting of monetary policy will generate stronger growth and we can avoid a further upward pressure on housing prices.”

Lowe acknowledged the risk high household debt levels posed to the Australian economy. Speaking in Sydney on Wednesday, Lowe said some households were shouldering “more debt than they have before.” Slower income growth was also placing added pressure on borrowers’ ability to service loans.

According to the latest data from the Reserve Bank, Australia’s household debt-to-income ratio is at a record 187%, mostly due to mortgage debt. If interest rates were to rise, Lowe warned that many consumers might have to severely curtail their spending to keep up with repayments.

Lowe is expected to face greater scrutiny on the outlook for interest rates and the broader economy when he faces the House of Representatives Economics Committee today.