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MNI (London)
Repeats Story Initially Transmitted at 08:20 GMT Jun 5/04:20 EST Jun 5
--RBA Sees Build-Up In Offshore Risks, Domestic Risk Little Changed
By Sophia Rodrigues
     SYDNEY (MNI) - The Reserve Bank of Australia's guidance remains that the
next move in the cash rate is more likely to be up than down but, if downside
risks come to pass, it is prepared to change the stance.
     Downside risks on the international front have risen in the past month but
on the domestic side the RBA thinks risks are little-changed from May. 
     Significantly, the RBA is not yet worried about the slowing in housing
prices or a tightening in lending standards. They remain risks to the forecasts,
but not yet a threat to the economy's growth and inflation forecasts.
     --NO DOMESTIC RISK PICK-UP 
     The RBA acknowledges that the housing markets in Sydney and Melbourne have
slowed, but notes that they have stabilized in Perth and Brisbane from previous
declines. The RBA still sees the fall in housing prices in Sydney and Melbourne
as a favorable development, representing an adjustment to faster increases
before.
     While there is some worry about further tightening in lending standards,
the RBA remains confident there won't be a credit crunch as mortgage rates are
declining, and banks are competing hard for business.
     The RBA's comment on declining mortgage rates is based on the
securitization data it holds on mortgages, which shows the actual rate paid by
borrowers. The published mortgage rates by banks may be higher than this and may
not reflect the decline.
     The RBA believes the falling mortgage rates may push borrowers to
voluntarily switch from interest-only loans to principal-and-interest loans,
prior to the expiry of their interest-only loans. If this happens, it would
mitigate the risk to the economy from substantial transition away from
interest-only loans expected in the next few years.
     --INTERNATIONAL RISKS INCREASED
     The number of downside risks from the international arena have increased in
the past month and they are important enough for the RBA to include in the cash
rate statement.
     Last month, the RBA cited two prominent international risks, namely on
possible escalation on trade tensions and build-up of debt in China. This month
it added two risks from developments in the eurozone related to Italy, and
economic developments in a few emerging market economies.
     Some of the fresh risks have been offset by declining risk with respect to
China, so overall the downside risks haven't escalated by much. Still, the RBA
is watchful.
     --IF RISKS GROW...
     The RBA continues to maintain its guidance that the next move in the cash
rate is more likely to be up but it will be a long way off, although that
guidance is conditional on gradual progress being made on growth, labor market
and inflation. 
     If downside risks grow and threaten progress, the RBA is prepared to change
the stance.
     But it is not there yet.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com