CANBERRA, AAP – The impact of the COVID-19 pandemic on Australia has yet to fully wash through, but the strength of the economic recovery so far is good for financial stability, the Reserve Bank says.

The head of financial stability at the Reserve Bank, Jonathan Kearns, has told an online forum that some of the economic effects stemming from the pandemic will have a lagged impact.

He says some households and businesses are still facing reduced income and are going to struggle with their debt payments.

“That will cause some issues for banks,” he told the Moody’s Investors Service Credit Trends forum.

“We expect that there will be some increase in non-performing loans and we certainly expect there will be some increase in business insolvencies also.”

However, he says the positive developments that have been seen in the economy are good for financial stability.

“We have seen a stronger recovery in the economy than we had expected,” he said.

“Compared to where we were a year ago or even six months ago, certainly the state of the economy is very positive.”

Mr Kearns was speaking the day after the December quarter national accounts showed the economy grew by a stronger than expected 3.1 per cent after an upwardly revised 3.4 per cent in the September quarter.

It was the first time the national accounts had recorded two consecutive quarters of three per cent-plus growth in the 60-year history of the series.

While it still left the annual rate contracting by 1.1 per cent, the RBA had only last month forecast a decline of two per cent for the year.

Mr Kearns said the central bank was not concerned at this stage by the strong increase in mortgage lending at the same time of a recovery in house prices, but it would monitor the situation carefully.

“Low interest rates tend to stimulate asset prices. It is not surprising to see some turnaround in the housing market,” he said.

“That highlights a renewed confidence in the household sector.”

He said there had been an improvement in the quality of lending over past five or six years with loans now very well secured.

“We don’t want to see an erosion of lending standards,” he said.

“It’s debt that causes financial stability problems, it’s not the level of asset prices.”