In its semi-annual financial stability review, the Reserve Bank of Australia (RBA) on Friday warned financial stability risks have increased over recent months.
The RBA said as interest rates rise, pressures on Australian household budgets and business cashflows are also rising while housing prices are declining.
"Financial stability risks would be magnified by a further substantial tightening in global financial conditions," said the RBA in its 70-page review.
"The outlook for financial stability over the coming years will hinge in large part on the ability of households and businesses to weather challenging economic conditions both in Australia and internationally," said the RBA.
Key quotes
Financial stability risks have increased globally.
Markets are stressed by synchronised policy tightening, geopolitical tension, higher us dollar, and rising energy prices.
Stability risks would be magnified by further substantial tightening in global financial conditions.
Australian banks are liquid, well-capitalised and resilient to any loan arrears.
Important that bank lending standards remain prudent.
Australian households and banks generally have strong financial positions.
Some households already feeling the strain from higher rates, likely to last for some time.
Lags mean rate rises yet to pass through completely to mortgage payments.
A small group of borrowers are particularly vulnerable to repayment difficulties.
Most mortgage holders have substantial equity in their homes and could weather very large price falls.
Many businesses face rising cost pressures, higher rates, and slowing revenue growth.
Indicators of financial stress are likely to increase in the period ahead.
Cyber-attacks and climate change are major challenges to financial systems.
AUD/USD update
Meanwhile, AUD/USD is trapped in daily ranges between 0.6525 and 0.6275, trading around 0.6410 as markets await the US jobs market data in a stronger US dollar environment at the end of the week.
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