UPDATE:RBA Kent:Bks Outstanding Funding Rate -10bps Since 2016

-Updated with comments from Q&A on AUD, future risks

-Material change in bank funding cost affect financial conditions

By Sophia Rodrigues

     SYDNEY (MNI) - A material change in the cost of funds for banks will

contribute to changes in financial conditions and have implications for the

wider economy, Reserve Bank of Australia Assistant Gov. Christopher Kent said

Wednesday.

     At present there is no such pressure because marginal rates of funding are

a little below the average outstanding rates -- which have declined close to 10

basis points since late last year, Kent said at a Bloomberg event at Sydney.

     Despite recent increases in long-term government bond yields across a range

of advanced economies yields on longer-term government debt are still quite low,

Kent said. Monetary policy remains very accommodative across advanced economies

and inflation is low. 

     Given the decline in bank-bond spreads since mid-2016 the same is true of

the costs of bank funding in longer-term wholesale debt markets, he said.

Funding costs in short-term debt markets are low, too.

     The recent appreciation in the Australian dollar is mainly a story of

depreciation in the U.S. dollar, Kent said at a Q&A session. This is mainly a

result of some unwinding of the "Trump trade" and because of a downward surprise

to recent inflation data.

     Financial markets may be underappreciating the risks of a faster rise in

inflation -- a possibility given the labor market is tightening, Kent said of

future sources of risks to financial markets. He also mentioned a tightening

labor market in Japan.

     Other risks relate to an increase of debt in China -- which could have

implications for both the Australia and international economies, Kent said.

     In the Statement on Monetary Policy published Friday the RBA again cited

China as a source of uncertainty to its forecasts. 

     "There continues to be uncertainty about how the authorities will negotiate

the difficult trade-off between growth and the buildup of leverage in the

Chinese economy. The adoption of a stricter regulatory approach to managing

risks in the 'shadow banking' sector over the past year, together with the

recent high-level directive to improve coordination among financial supervisors,

could lead to tighter-than-expected financial conditions and result in growth

being weaker than expected," the RBA said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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