RBA warns a sharp rise in interest rates could lead to disruptive and lasting market corrections

| 14.04,18. 03:13 AM |




RBA warns a sharp rise in interest rates could lead to disruptive and lasting market corrections




Record low interest rates, accelerating asset prices and a growing appetite for risk could be laying the groundwork for a sharp correction across financial markets, the Reserve Bank has warned.


In its latest Financial Stability Review released on Friday morning, the RBA says strong global economic conditions over the past six months suggests asset prices have surged because investors "see little chance of adverse outcomes".


However, the RBA warns that a sharp rise in interest rates from rising inflation could cause a shock and catch investors by surprise.


"A detrimental shock could lead to a disruptive and lasting correction in a broad range of markets," the RBA says.


"Investors have also taken on more risk in recent years, making them more susceptible to large losses if there were a generalised fall in asset prices.


"This could be triggered by a sharp rise in interest rates in the absence of stronger economic growth arising from, for instance, a jump in realised or expected inflation or a change in investors' risk appetite."


The review cites share market volatility in recent months caused by uncertainty about US Federal Reserve rate rises as an example of how markets can correct quickly.


"The falls in global equity prices in recent months have provided a timely reminder that asset prices can fall quickly with price movements exacerbated by pro-cyclical investor behaviour," the RBA says.


The RBA has also warned that governments are potentially exposed to any correction or shock because of high levels of debt fuelled by record low interest rates.


"The higher debt levels raise concerns about the resilience of a range of borrowers to any adverse shocks, particularly as global monetary policy accommodation starts to be unwound," the RBA says.


Risk of rise in household financial stress


While the review says Australia's financial system remains "resilient" in its ability to withstand shocks, it has raised concerns about high levels of household debt.


"The high level of household indebtedness increases the risk of a rise in household financial stress amplifying a shock to the economy," the RBA warns.


"Most indicators suggest that the incidence of household financial stress is not widespread although some households could be tested were unemployment to increase."


The RBA says some borrowers are in arrears as they transition from interest-only repayments to interest and principal payments after intervention by the Australian Prudential Regulation Authority.


"This partly reflects borrowers taking time to adjust, although for a small share of borrowers this has reflected difficulty in making the higher repayments."


However, the RBA says tougher regulatory measures and a strengthening in lending standards have helped moderate housing market conditions in Australia.


But the RBA says commercial property remains "an area to watch" although a large stock of apartments near completion in Brisbane and other capital cities are being "absorbed with little disruption".


The review briefly touches on the Financial Services Royal Commission and notes the increasing focus on culture at banks and the impact on their businesses.


"International experience has shown that poor culture can have significant adverse effects on banks including their financial importance."


The RBA singled out the Commonwealth Bank which is in a legal battle over allegations that it broke anti-money laundering and anti-terror financing laws on almost 54,000 occasions.


abc


(Votes: 0)

Other News

NAB linked to investigation into multi-million-dollar corporate fraud House prices predicted to keep falling, but Melbourne and Sydney units to take biggest hit Barnaby Joyce calls on Malcolm Turnbull to improve by Christmas or consider giving up the leadership ?When's the right time to get the flu jab NBN launches fibre-to-the-curb technology, but existing customers won't benefit Sydney light rail contractor Acciona suing NSW Government; further delays to construction likely Channel Country floodwaters expected to rise in Birdsville before draining into Lake Eyre Borrowing crackdown could mean an $80k income makes you eligible for a $200k loan Four officers suspended by Victoria Police over alleged excessive force Address of His Excellency Bishop Antoine-Charbel Tarabay Interfaith Gathering for the Feast of the Annunciation WA finally lands GST increase but other states aren't so lucky in revised carve-up Homebuyers' borrowing capacity could be cut by up to 40 per cent under tougher rules Tropical Cyclone Iris continues to track along Queensland coast CCTV shows Victorian police officer throwing handcuffed Bendigo man into door amid calls for complaints overhaul Police accused of using excessive force during arrest of 'face down, disarmed' man Melbourne police captured on video taking down disability pensioner Woman charged with murder after man found with serious head injuries on Good Friday dies Woman escapes from plane crash near Bankstown Airport in 'Easter miracle' Explosive device 'capable of causing serious injury' found in Ipswich shopping centre carpark Message of His Excellency Bishop Antoine-Charbel Tarabay to the Faithful on the occasion of Easter 2018 Beaches closed along Gold and Sunshine Coasts at start of Easter weekend due to cyclonic surf Queensland weather: More rain on the way for flooded communities in state's north Aussie selling virginity for $160,000 Teenager held down by police, hit with baton in Byron Bay yelled 'I'm not resisting', inquiry hears Pet food recalled after dogs with rare illness euthanased Hold off getting the flu vaccine, AMA says Grattan Institute urges compensation for higher power bills caused by energy grid 'gold plating' Teen fails her driving exam by crashing into test centre before leaving carpark Baby among three dead in Kingaroy house fire as passer-by saves young boy Barack Obama gives secret address at Art Gallery of NSW; lucky invitees hint at presidential remarks