The number of Australians in financial stress is “small” but will be “magnified” if the economy slows more than expected or interest rates linger higher for longer, the Reserve Bank has warned.

While overseas challenges – including a faltering Chinese economy – could also upset forecasts, Australia’s financial system continued “to display a high level of resilience”, the bank said in its semi-annual financial stability review.

As with its March version, the bank said about 5% of owner-occupiers on variable-rate mortgages were estimated to have incomes that fell short of essential expenses and scheduled repayments. Fewer than 1% of such housing loan balances were more than 90 days in arrears and while lenders expect a further slight increase, the level will likely remain around pre-pandemic levels, the report said.

The “vast majority of borrowers” were servicing their debts, it said. The revival in property prices also meant fewer than one in 10,000 borrowers were in arrears and also suffering negative equity on their loans.

The report comes days after the RBA left its key interest rate unchanged for a seventh consecutive meeting. The bank’s board, though, did not explicitly consider the case for lifting its cash rate – for the first time in four meetings – increasing expectations its next move will be a cut.

With August headline inflation falling to a three-year low and the economy still generating enough jobs to accommodate a swelling population, pressures on borrowers may ease even without lower interest rates.

“The central forecasts from the August Statement imply that budget pressures on households should start to ease in the second half of 2024,” the review said. “The implementation of the Stage 3 tax cuts and further declines in inflation are expected to result in a pick-up in real disposable income growth over the rest of the year.”

For many companies, conditions remained challenging, particularly smaller firms. “Business insolvencies have increased sharply over the past couple of years following the removal of pandemic-era support, though they are only slightly above pre-pandemic levels as a share of all businesses,” the review said.

Most businesses were profitable, with margins “around” pre-Covid levels. Companies exposed to discretionary consumer spending, such as hospitality, faced relatively tough conditions, it said.

The report identified three externally sourced “vulnerabilities” including from China, where the treasurer, Jim Chalmers, is holding talks with counterparts on Thursday and Friday.

Ongoing weakness in the property market “could see stress spill over to the rest of the Chinese economy and financial system”.

“The key channels of transmission of financial stress in China to Australia would likely be via increased risk aversion in financial markets, a sharp slowing in global economic activity, lower global commodity prices and reduced Chinese demand for Australian goods and services,” it said.

Other risks included “high” geopolitical tensions in Ukraine and the Middle East, and “policy uncertainty associated with upcoming elections that could result in further geopolitical fragmentation”, it said, without naming nations.

The US goes to the polls on 5 November, with the vice president, Kamala Harris, neck and neck with former president Donald Trump.

“Climate change presents both physical and transition risks, which could result in unexpected losses for lenders, increased claims on insurers and write-downs for investors,” the report said.