Australia’s central bank sees risks mounting in global markets, China property

SYDNEY, Oct 6 (Reuters) – Australia’s economy is well placed to weather strains in global financial markets, though the risks of a “disorderly” slide in asset prices or a slowdown in China were elevated, its central bank said on Friday.

In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) also noted that higher interest rates were pushing more households into financial stress, though it judged most could cope should rates have to rise again.

“Most Australian households and businesses remain well placed to adapt to the challenging set of economic conditions, though some are vulnerable to further shocks,” wrote RBA Governor Michele Bullock in the foreword to the 71-page review.

This is Bullock’s first review since being promoted from deputy in mid-September.

In an effort to curb surging inflation, the central bank has lifted interest rates to a decade-high of 4.1%, causing widespread financial stress among households where debt levels are at record peaks.

That strain is one reason the RBA has put rate hikes on hold for the past four months, though it continues to caution that further tightening might be needed if inflation does not subside as hoped.

The review estimated most borrowers with variable rate mortgages had seen payments rise by between 30% and 50%, while many with lower fixed rate loans would see similar increases as those rolled over.

As a result, the share of owner-occupiers whose loan costs and essential expenses exceeded their incomes had increased to around 5%, up from 1% in early 2022. Under a broader measure of expenses, that share could be as high as 13%, it added.

“A small, but rising share of borrowers are on the cusp, or in the early stages, of financial stress,” the review stated.

Nevertheless, the RBA judged the stress was manageable overall with Australian banks more than well capitalised to absorb rising arrears or losses on loans.

Instead, much of the review was focused on risks from offshore, where a tightening in global financial conditions was threatening to lead to a disorderly decline in asset prices and a slump in economic growth.

A vicious sell off in U.S. government bonds recently has seen yields rise sharply across the globe and put pressure on equity markets in the process.

Such pressure would only grow should inflation prove more stubborn than expected requiring interest rates to stay higher for longer, the RBA warned.

“A tightening in global financial conditions could transmit to Australia via linkages in funding markets and risk aversion,” the review said.

Financial institutions in some countries, and particularly the United States, were also exposed to losses in commercial real estate that could curtail their ability to lend, the RBA said.

Another area of concern was China’s property sector where financial stress was proving a drag on the world’s second largest economy and Australia’s single biggest export market.

(Reporting by Wayne Cole)