The RBA said although domestic economic conditions remain broadly supportive of financial stability and the unemployment rate remaining at around 5 per cent since the last review, GDP growth had slowed and housing market conditions remained weak.
The country’s stability is also susceptible to key trading partners and global financial markets remaining raised, as global GDP growth has slowed and asset prices have remained elevated.
Australian consumption growth has also eased, the RBA said, with its outlook being uncertain.
Last week deputy governor Guy Debelle said, in an address to the American Chamber of Commerce, that low household income growth had given way to slowing consumption, causing GDP growth lower than previously expected in the December quarter.
Measures of financial stress in households were found to be generally low however, with “households remaining well placed to service their debt given low unemployment, low interest rates and improvements to lending standards,” the review said, although there has been an increase in housing loan arrears rates.
The review has warned of international risks for Australian financial stability, with the nation’s “integration with global trade and financial markets meaning that external factors may quickly be transmitted to domestic economic and financial conditions.”
Trade tensions could escalate and in China, the RBA believes “the balance between stimulating a slowing economy and addressing financial stability could falter.”
The bank also noted political uncertainties in Europe as a downside risk with high sovereign debt levels in some of the region’s countries raising the risk that debt sustainability concerns will re-emerge, increasing funding costs and causing difficulties in rolling over or raising new debt.
Long-term rates have declined after earlier rising with strong growth, as the US Federal Reserve has delayed interest rate hikes for the rest of the year.
It also noted government bond yields in major advanced economies remaining low, having declined over the last six months.
In Australia, 10-year bond yields reached record lows in March, with experts saying they’re likely to sink further.
“Investors have generally been taking on more risk in the low interest rate environment, leaving them more exposed to asset repricing,” the RBA noted.
“In particular, some investors have moved into lower-rated, illiquid or longer duration assets.”
The review also examined the increased use of algorithmic or automatic trading, which it said could also amplify price movements.
The RBA added that technological warfare could also be a looming threat for the finance sector, with increasing focus on protecting against cyber attacks.
“Australian financial entities face key risks from their large, complex and interconnected information technology systems,” the review noted.
“These are subject to disruption for a range of reasons, not least of which is cyber-attacks. Such attacks are a constant threat to the financial sector and, while a systemic event is unlikely, it could have severe consequences for the financial system.”
Conditions in the housing market remain weak with demand not being on par with the increased supply and prices being 7 per cent below their late 2017 peak.
Household debt is still at a high level despite housing credit growth in Australia slowing.
Housing prices have also fallen since the last review, the RBA noted.
“It is unusual, in Australia and internationally, for property prices to be falling while interest rates and unemployment are low,” the review said.
“The prevalence of negative housing equity is low, but substantially larger price falls would see a large share of households’ housing equity eroded or even turn negative.”
Also a concern for the Reserve Bank is the challenge for institutions focusing on the large degree of change required by the royal commission.
It said the banks will be tested in managing the implementation of changes in an effective and timely manner, while potentially being distracted from managing other risks.
