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MNI RBA STATE OF PLAY:Fin Stability Worry Eases But Still High

By Sophia Rodrigues
     SYDNEY (MNI) - Financial vulnerabilities from Australian household debt and
the housing market may have diminished slightly since April but not enough for
them to have little or no impact on the Reserve Bank of Australia's monetary
policy decisions.
     This is likely to be the main message of the Financial Stability Review
(FSR) and it will reinforce Governor Philip Lowe's stance to be patient with the
1.5% cash rate, keeping it on hold for longer. The review will be published at
1130 hours local time Friday.
     The FSR is not among the most watched publications of the RBA but given the
focus on financial stability in recent years and the impact it has had on
monetary policy decisions, this document could provide an insight on the outlook
for RBA policy.
     As long as financial stability risks remain, Lowe is likely to use the
flexibility in the RBA's inflation targeting mandate to resist lowering the cash
rate further even when inflation remains outside the target band.
     The term financial stability is broad and according to Assistant Governor
for Financial System Michele Bullock the RBA thinks of it as "financial
disturbances that could ultimately threaten the health of the economy."
     In that sense, the RBA looks at the human side -- the human cost of
financial instability. The gauge for that is the resilience of households to
shocks in the economy.
     In the previous review in April, the RBA said "vulnerabilities related to
household debt and the housing market more generally have increased, though the
nature of the risks differs across the states."
     Since then, in reaction to steps taken by the Australian Prudential
Regulation Authority, there has been a drop in the interest-only mortgages and
the pace of investor mortgage growth has slowed.
     The RBA had characterized both these as key risks to the macro-economy and
their reduction, along with a slowing in housing market activity, means some
risks to financial stability have declined.
     But overall household debt remains elevated and, importantly, growth in
household debt has outpaced household income for some time. Some of this is due
to slow growth in household incomes but irrespective of the reason, the RBA sees
high household debt as a medium-term risk to the economy.
     The RBA views were echoed in the International Monetary Fund's recent
Global Financial Stability Report, which said that "an increase in household
debt boosts growth in the short term but may give rise to macroeconomic and
financial stability risks in the medium term."
     Of particular relevance to Australia is a comment in the IMF report that
"the negative medium-term consequences of increases in household debt are more
pronounced for advanced than for emerging market economies."
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$,MX$$$$]

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