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MNI (London)
--RBA Alert To Fin Stability, MonPol Tension if Rates Rise
     SYDNEY (MNI) - The Reserve Bank of Australia is well-placed to meet
financial stability goals when interest rates eventually rise but its monetary
policy goals could come under threat, leaving the central bank hoping that
higher rates come in an environment of strong growth and lower unemployment.
     There is a risk that as global interest rates rise to more historically
normal levels, financial entities exposed to interest rate risk could see
substantial losses. But in case of Australian financial institutions, that rate
risk is relatively low because they are borne by bank customers and insurance
company policyholders.
     This risk pass-off comes as 80% of Australian mortgages are priced using a
variable rate that moves with short-term rates, while most business loans are
priced at a fixed premium to the three-month bank bill swap rate. Because the
re-pricing of assets can be done within one month, banks can easily manage their
direct interest rate risk, though they are still exposed to other indirect
     As rates rise, financial stability risks can thus be easily dealt with but
it could potentially lead to risks to the economy and cause a monetary policy
dilemma for the RBA. As Australian banks rely heavily on overseas funding,
pricing of their own lending products can be directly affected by offshore
interest rate moves, impacting the central bank's transmission mechanisms.
     Higher overseas rates could still be a manageable outcome for the RBA if
they are driven by stronger economic growth, even though some risk remains that
the domestic economy has not yet made enough progress.
     A bigger risk to the RBA is if interest rates increase due to factors such
as a jump in overseas realized or expected inflation, or a change in investors'
risk appetite. This would be more worrisome for the RBA, as it could push up
lending rates before the economy is strong enough to withstand rate increases.
     In the past, the RBA has offset such lending rate increases by lowering the
official cash rate. But given the already low level of the cash rate, the RBA is
likely to resist any move lower -- underlined recently as Governor Philip Lowe
has shown strong resistance to lowering the cash rate any further.
     As recently as this week, he explicitly pointed to the prospect of the next
move for the "cash rate" and not just interest rates to more likely be up.
     In the latest of its twice-yearly Financial Stability Review, published
Friday, the RBA said macro-financial risks emanating from the household sector
remain, given the high level of household debt and strong growth of riskier
lending in the previous year.
     The RBA used the term "macro-financial" for the first time and this is
mainly to indicate and underline the interest rate risk.
     "The high level of household indebtedness increases the risk of a rise in
household financial stress amplifying a shock to the economy," the RBA said.
--MNI London Bureau; tel: +44 203-586-2225; email:
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MX$$$$,M$$FI$]
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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