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--
By Sophia Rodrigues
     SYDNEY (MNI) - A important feature of the Australian banking system where a
significant proportion of mortgages can be re-priced within a month is a key
risk for the economy in the event of sharp rise in interest rates and keep the
Reserve Bank's monetary policy on hold for longer.
     The risk is greater if interest rates rise in the absence of stronger
growth and due to factors like a jump in realized or expected inflation or a
change in investors' risk appetite.  
     Such a risk means the RBA will raise the cash rate only if it is satisfied
that enough progress is made towards its growth, unemployment and inflation
goals, and households are in a position to withstand higher interest rates.
     The twice-yearly publication -- Financial Stability Review -- published
Friday said macro-financial risks from the household sector have somewhat abated
but still remain, given high level of household debt and strong growth in
riskier lending in the past.
     The publication contained an important discussion on the risk to the
Australian financial system from higher interest rates. The discussion concluded
that direct risk from a sharp increase in interest rates is relatively low
because the risk is mostly borne by customers and policyholders.
     One of the reasons for that is that around 80% of Australian housing loans
are priced using a variable interest rate that move with short-term interest
rates, and business loans are priced at a fixed premium to the 3-month bank bill
swap rate.
     "Australian bank have more assets that can be repriced within one month
than they do liabilities," the note said.
     The discussion is relevant given the recent rise in bank bill rates. The
RBA noted that spreads on short-term debt have recently spiked to their highest
level since 2009 but unlike in the past, the factors causing this is changes in
the demand for and supply of U.S. money market instruments. 
     The risk is that if this trend continues it could lead to rise in mortgage
rates, with risk of sharp rise not negligible.
     If mortgage rates rise sharply, it would increase the incidence of
household financial stress amplifying a shock to the economy.
     Currently, most indicators suggest that the incidence of household
financial stress is not widespread although some households could be tested if
unemployment were to increase, the RBA said.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]

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