REPEAT: MNI: RBA's Growth Hope As Macro-Financial Risk Remains

--RBA Alert To Fin Stability, MonPol Tension if Rates Rise

by Sophia Rodrigues

     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

risks.

     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.

     --OVERSEAS RATES PROBLEMATIC

     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.

     --MACRO-FINANCIAL RISK

     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 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

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