US-China trade war warning: RBA
A RISE in trade tension between China and the US poses a growing risk to the health of the nation’s economy, the Reserve Bank has warned.
But Australia’s central bank is not fazed by the fall in house prices in key capitals such as Melbourne and Sydney or worried about the ability of homeowners to repay their loans as interest rates rise.
The assessment was delivered in the RBA’s latest twice-yearly Financial Stability Review, released yesterday.
The health check on the fi- nancial system and economy comes in a week in which global markets were shaken by a sharp selldown on Wall Street
“Downside risks to growth have become more prominent since the previous review, particularly due to the rise in trade protectionism,” the report said.
While the impact of the trade war between the world’s two biggest economies had been “relatively modest”, this might not remain the case.
“If the imposition of trade barriers were to intensify, or if it materially affected business sentiment and decisions, the negative impacts on economic growth could be more significant,” the report said. “Australia would be sensitive to a sharp contraction in global growth or dislocation in global financial markets because of the importance of trade and capital inflows.”
More than $90 billion was stripped from the Australian share market this week in a rout triggered as investors in the US reassessed expectations of the pace of interest rate hikes in the world’s biggest economy and fretted about trade tension with China.
It said the era of ultra-low interest rates spawned by the global financial crisis meant investors had been willing to accept more risk for less return.
This might leave them exposed to unexpected increases in rates or a global shock.
“With the price of risk so low, there is a heightened possibility that an increase in expected or realised inflation or a negative growth shock could result in a significant and widespread rise in volatility and repricing in financial assets,” the RBA said. “Some investors may not be well prepared for such repricing, with the potential for some large losses and reactive sales of assets.”