Brakes On Borrowing As Banks Keep Closer Eye On Credit

The Age

Thursday May 1, 2008

Tim Colebatch

BORROWING by business has braked abruptly, as growth in credit from the banks has slowed to its lowest level in seven years, pointing to tough times ahead for banks and their customers alike.

Reserve Bank data shows total credit from the banks expanded by 0.8% in March, following a revised 0.6% growth in February. While these would be handy growth figures for most businesses, for banks, that's virtually going backwards.

It was the worst quarter in the credit business since 2001, with annual growth slowing from 16.5% in December to 14.9% at the end of March. The figures add to growing evidence that the economy is braking steeply, as higher interest rates, the global slowdown and plunging confidence put growth on hold.

The Reserve is also seen as being on hold. Despite last week's jump in underlying inflation to 4.25%, money markets now see only a 10% chance that the Reserve's board will raise rates when it meets next week.

"The RBA's plan is to slow the Australian economy, dampening inflation pressures in the process," said Macquarie Bank economist Rory Robertson. "And importantly, evidence is accumulating that higher rates and tighter credit conditions indeed are biting, slowing domestic demand.

"I'm inclined to think that after a long period of 7.25% cash (rate), the RBA's next move will be down."

The big turnaround has been in credit to business. After averaging growth of almost 2% a month in the second half of last year, credit growth slowed to 0.3% in February and 0.9% in March. In late 2007, companies unable to keep issuing bonds had to line up for a loan from the bank. Now they are just not borrowing.

Household borrowing for owner-occupied housing has remained surprisingly strong, growing at an annualised rate of almost 12% in the March quarter. But growth in investor housing remains subdued, while people paid back more personal loans than they took out in the March quarter.

Further rises in interest rates by the Big Four banks in recent days is expected to squeeze credit growth still more tightly as the year goes on. Family First senator Steve Fielding, a former accountant, urged the Government to re-regulate bank lending rates to protect consumers.

"Banks are a law unto themselves, and no one is holding them to account for hiking interest rates above Reserve Bank increases, and charging exorbitant penalty rates," Senator Fielding said.

"Banks should have to seek approval for interest rate increases, much like approval is sought for increases in private health insurance premiums."

© 2008 The Age

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