Lending lifts; Deposits record biggest fall in 11yrs

Private sector credit

• Private sector credit (lending) rose by 0.5 per cent in April after a 0.4 per cent lift in March. Annual credit growth rose from 4.4 to 4.5 per cent – the strongest growth in five years.
• Overall housing credit lifted by 6.1 per cent on a year ago, with investor housing finance up 8.2 per cent – marking the strongest annual growth in 3½-years. Business and consumer credit were more mixed.
• More money put to work: Term deposits fell by 1.2 per cent over the year – the biggest decline in 11 years.

What does it all mean?

• In short, the latest private sector credit or lending data is encouraging, particularly given that the lift in credit continues to be relatively broad-based. It wasn’t surprising that housing credit continued to be the main driver but the rise in business borrowings is a huge positive – particularly in light of the recent improvements in labour market conditions and business hiring intentions.
• Business conditions are healthy and it seems to be translating through to a lift in business borrowings, with annual growth coming in at 2.7 per cent – a 15-month high. At the same time, investor housing credit is growing at the fastest pace in 3½-years and will support the broader economic recovery.
• But apart from taking out loans to buy investment properties and the encouraging lift in business activity. Aussie consumers remain reluctant to borrow. Personal debt is still down almost 9 per cent on the peak recorded six years ago and the level of debt effectively hasn’t budged in five years. And the negative backlash and concerns over the Federal Budget is unlikely to result in a shift in the inherent level of consumer conservatism in coming months.
• The private sector credit figures are important because they are part of the Reserve Bank’s assessment of financial conditions. The level of interest rates, asset prices (home prices), the Aussie dollar and credit are the four factors the Reserve Bank assesses to determine financial conditions. Credit is lifting of a low base, home prices are rising and it has resulted in an improvement in discretionary spending in recent months.

What do the figures show?

Private sector credit

• Private sector credit (lending) rose by 0.5 per cent in April after a 0.4 per cent rise in March. Annual credit growth rose from 4.4 per cent to 4.5 per cent – the strongest growth in five years.
• Housing credit grew by 0.6 per cent in April after a 0.5 per cent rise in March. Housing credit is up 6.1 per cent on a year ago – the strongest annual growth in 3 years.
• Owner occupier housing credit rose by 0.5 per cent in April to stand 5.0 per cent higher than a year ago. And investor housing finance lifted 0.8 per cent in April to be up 8.2 per cent over the year – the strongest growth in 3½-years.
• Personal credit was flat in April after falling by 0.1 per cent in March. Personal credit was up 0.5 per cent over the year.
• Business credit rose by 0.3 per cent in April. Business credit is 2.7 per cent higher than a year ago – the best result in 15 months.
• Term deposits held with banks fell by $2 billion in April to $536.3 billion, the lowest result in 22 months. Term deposits are down 1.2 per cent on a year ago – the biggest annual decline in 11 years.
• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business.Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.
• The Reserve Bank would be happy to see more “risk” taken on by investors – money moving from term deposits to property investments. But overall it is clear that Aussie consumers in general are reluctant borrowers and that means the Reserve Bank doesn’t need to be in a rush to lift interest rates. Credit growth is still modest and inflation is under control. Seemingly “normal” annual credit growth is now 4-5 per cent, as opposed to the 8.3 per cent decade average and 11.8 per cent long-term average.

What is the importance of the economic data?

• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business.Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What are the implications for interest rates and investors?

•  The Reserve Bank would be happy to see more “risk” taken on by investors – money moving from term deposits to property investments. But overall it is clear that Aussie consumers in general are reluctant borrowers and that means the Reserve Bank doesn’t need to be in a rush to lift interest rates. Credit growth is still modest and inflation is under control. Seemingly “normal” annual credit growth is now 4-5 per cent, as opposed to the 8.3 per cent decade average and 11.8 per cent long-term average.