Mr. Kearns explained that bond rates or “risk-free sovereign rates do support the pricing of all kinds of assets”.
“If returns rise due to risk premiums, it can affect the pricing of a wide range of assets,” he said.
“Investors who thought they had protection from owning bonds and stocks may find that all of their assets plummet simultaneously with wealth.”
Mr Kearns said the businesses were in better shape than the Reserve Bank had initially expected and had cash buffers to cover four to six months of expenses.
This should help navigate the reduction in stimulus payments, but some companies and industries would fare better than others.
He also said households were in good health and that, exceptionally for a recession, household incomes increased in 2020.
Mr Kearns said the most recent national accounts showed households were more confident and were willing to spend the savings buffer they had built up.
“It would seem likely that households will become more convinced that they are more willing to spend,” he said. “We are seeing an increase in spending because it indicates their confidence in their situation.”
Mr Kearns said the Reserve Bank was not concerned about rising house prices, while acknowledging that rising house prices tended to accompany an increase in borrowing.
“In terms of increasing risk, it depends on the quality of the borrowing, so it’s important that we don’t see an erosion of lending standards,” he said.
