Australia well placed to bear credit stress-cenbank

SYDNEY (Reuters) - Australia is much better placed than many other countries to weather turmoil in global financial markets, its central bank said on Thursday, suggesting it was in no rush to ease interest rates from 12-year highs.

The Reserve Bank of Australia (RBA) said in its semi-annual Financial Stability Review domestic banks remained highly profitable and well capitalised, while household and business balance sheets were healthy overall.

"Despite the strains in global financial markets, the underlying resilience of the Australian financial system, together with the relatively favourable outlook for the domestic economy, means the system is much better positioned than the financial systems of many other countries to cope with the current difficulties," said the central bank.

Earlier, RBA Governor Glenn Stevens used a speech to a financial markets conference to emphasise that the Australian banking system was sound and little exposed to the woes besetting U.S. subprime debt.

Analysts took the central bank's reassurances to mean it was content with the current level of interest rates, and certainly in no rush to cut rates as some in the markets have been betting on.

"There was certainly nothing that supported current market pricing for the possibility of rate cuts by year end," said Michael Blythe, chief economist at Commonwealth Bank.

Markets are currently pricing in around 46 basis points of cuts in the next 12 months, even though it was only a few weeks ago that the RBA raised rates to 7.25 percent.

"Our view remains that the strength of the domestic economy and the near-term inflation trajectory still favour a lift in the cash rate to 7.5 percent by mid-year," added Blythe.

UNDER STRAIN

Investors have been wagering that the increasing stress in global credit markets and growing risk of a U.S. recession would dissuade the RBA from tightening any further.

Stevens noted that the outlook for the U.S. economy had deteriorated markedly in recent months and saw a risk of contagion spreading from the credit squeeze as it saps confidence in the world economy.

"The global financial system is currently under more strain than it has been at any time since at least the early 1990s," the central bank said in its assessment.

"We read the tenor of Steven's speech as highlighting very difficult financial market conditions and the small but worrying risks of greater de-leveraging and downside risk to economic growth," said Stephen Roberts, a research director at Lehman.

"We see the RBA on steadfast policy hold unless there is compelling evidence that inflation is stronger than they have allowed in their forecasts," he added.

Inflation accelerated to a 16-year high of 3.6 percent last quarter, putting it well above the RBA's 2 to 3 percent comfort zone and leading to rate hikes in both February and March.

The inflation report for the first quarter is due on April 23 and analysts now generally assume it would take a very high reading to push the central bank into tightening in May.

In a seperate speech on the financial crisis, Australian Prime Minister Kevin Rudd urged governments around the world not to retreat into protectionism as a way to insulate their economies from market volatility [nSYD112694].

Rudd is about to embark on his first tour of global capitals since his left-of-centre Labor Party won power late last year. The Australian leader meets U.S. President George W. Bush on Friday before flying on to Europe and China.

(Editing by Richard Pullin)