Australia central bank warns US tariff policies could threaten global growth

SYDNEY, April 3 (Reuters) - Australia's central bank warned on Thursday that U.S. trade policies could pose significant headwinds for the global economy, causing a sharp rise in risk aversion in markets and lifting financing costs for firms.

The warning came as global share prices sank in the wake of U.S. President Donald Trump's announcement of new tariffs, prompting threats of retaliation from many trading partners.

In its semi-annual Financial Stability Review, the Reserve Bank of Australia (RBA) cautioned that ongoing uncertainties with U.S. trade policies, and the reprisals they may trigger, could have a chilling effect on business and household spending.

"Vulnerabilities in key international financial markets could be crystalised and lead to disorderly price adjustments," said the RBA in a 63-page document.

"A sharp repricing of risk, from the current low levels, could abruptly increase borrowing costs for corporations and exacerbate financial challenges," it added, noting that the non-bank lending sector could be more at risk.

The report was finalised before Trump's announcement that he will impose a 10% baseline tariffs on all imports to the United States, and much higher levies on some major trading partners.

Australia will be subject to the minimum levy of 10%, but tariffs on its biggest export market China could be as high as 54%.

A slowdown in China would exacerbate long-standing vulnerabilities in its financial system from weakness in the real estate sector, which has yet to show a solid recovery.

That, in turn, could necessitate a further policy response from Beijing to support economic growth, although that could also increase the debt overhang in some sectors of the economy.

Domestically, the RBA reiterated that banks were well-capitalised, businesses remained resilient and financial pressures facing households seemed to have eased a little as inflation slows and interest rates fall.

The RBA held interest rates steady at 4.1% on Tuesday, having cut in February for the first time in over four years. It was now waiting for more data to be sure inflation is heading in the right direction, wary that strength in the labour market could stoke price pressures.

Swaps imply a 70% chance for an easing in May, while the total easing expected this year has jumped to 80 basis points given the latest news on U.S. tariffs.

The RBA estimated that about 3% of the borrowers are currently at risk of falling behind their loan repayments, compared with the peak of 5% a few quarters ago.

It did note that vulnerabilities could build if an easing in financial conditions encourages households to take on excessive debt. Home prices rose to record highs in March following the February rate cut.

"Regulators will closely monitor potential housing-related vulnerabilities that could emerge over time from any actual or anticipated easing of financial conditions," it said.

(Reporting by Stella Qiu, Editing by Wayne Cole)

Keywords: AUSTRALIA ECONOMY/RBA