The Reserve Bank of Australia has given a clean bill of health to banks and households, suggesting financial conditions in Australia are no barrier to raising interest rates as needed to curb inflation.
In its semi-annual review of the financial system, the RBA noted the banks were profitable and well capitalised, supported by the recovery in the broader economy where growth had returned to trend.
The RBA says banks are also well placed to meet tougher global regulations, though there are some problems with a requirement for holding liquid assets, given the relatively small amount of suitable government debt in Australia.
The financial positions of the household and business sector remained sound, with economic growth boosting profits and employee incomes.
There is speculation the bank could raise its interest rate of 4.5% next week, to head off inflationary pressures from a mining boom.