US-China trade war warn­ing: RBA

Mercury (Hobart) - - BUSINESS - JOHN DAGGE

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.”

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