Lower interest rates would have the power to help Australian households withstand another global financial crisis, the Reserve Bank says.
In a stress test to assess how households would financially withstand major shocks such as recession, RBA modelling has shown "a high level" of resilience among Australian households, and limited losses for lenders.
A discussion paper published on Monday said although household debt had risen from around 40 per cent in the 1980s to 150 per cent by the mid 2000s, that hadn't made households more fragile.
That's because debt had remained concentrated among households that were best placed to service it, the paper said.
"The model suggests that through the 2000s the household sector remained resilient to scenarios involving asset price, interest rate and unemployment rate shocks, and the associated increases in household loan losses under these scenarios were limited," RBA researchers said.
In a scenario of rising unemployment and falling asset prices, similar to what Australia experienced during the global financial crisis, lower interest rates were able to prevent loan defaults, the researchers said.
"By reducing debt-servicing costs, the interest rate reduction increases financial margins and thus makes borrowers less likely to default," they said.
"Australia's experience during the global financial crisis suggests that it is not implausible.
"With the assistance of accommodative monetary policy, the Australian economy was able to absorb a shock of similar magnitude during the crisis with limited aggregate impact on household loan performance."
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