MNI ANALYSIS: Loan Repricing On Higher Rate Risk To RBA MonPol

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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

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