Aussie private sector credit aggregates up 1.2%m/m

Aussie private sector credit aggregates up 1.2%m/m in May

Australia's private sector credit aggregates rose 1.2%m/m in May (JPMorgan 1.3%, consensus 1.1%) compared to 1.2% in April (revised up from 1.1%). From a year ago, total private sector credit growth grew a solid 14.6%, the same rate as in the previous month (which was revised up from 14.5%).

A breakdown of the credit aggregates showed that business lending once again underpinned credit growth. Business lending was up 1.4%m/m, or a massive 17.3%oya, a rate which will undoubtedly concern the RBA. That said, strong business lending should bode favorably for Australia's economic outlook given that solid business investment remains key to alleviating the infrastructure bottlenecks and capacity constraints currently preventing the nation's exporters from taking advantage of still-elevated commodity prices. Housing-related credit accelerated to 1.1%m/m in May as households rushed in to secure loans ahead of the much-talked about interest rate rise that month (which failed to come to fruition), while personal credit grew a solid 1.2%, considerably higher than the 0.8% recorded in April.

Private sector credit has been a focus of RBA commentary in recent months and the near 15%oya rate of credit expansion is unlikely to sit comfortably with RBA officials in the run-up to their July policy meeting next week. The RBA has often cited excessive credit growth as a potential trigger to higher interest rates. With credit growth still expanding rapidly, the economy running near full capacity, unemployment at multi-decade lows, and fiscal stimulus likely to pick up in the run-up to the Federal election (expected to be held sometime later this year), inflation pressures are building by the day. Furthermore, food and electricity prices are moving higher owing to the drought, petrol prices remain elevated and anecdotes from companies indicate that labor shortages finally are triggering wage pressure, albeit mildly.

JPMorgan forecasts that the RBA will hike interest rates 25bp next week, taking the cash rate to 6.5%, given the case for a near-term tightening has indeed strengthened in recent weeks. Real GDP growth of 1.6%q/q in 1Q was the strongest quarterly growth rate since December 2003, and well above potential - the widening gap between the economy's actual and potential growth rates will fuel additional inflation pressure. Failure to cap inflation pressure now with a pre-emptive rate hike would mean that the RBA would possibly tighten policy in August, which would be difficult to explain given the widely anticipated plunge in headline CPI below the central bank's 2% to 3% comfort zone.

ENDS

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