0.4% gain in Aussie credit aggregates unexpectedly

0.4% gain in Aussie credit aggregates unexpectedly large

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Today’s credit aggregates showed an unexpectedly large 0.4%m/m gain (J.P. Morgan and consensus 0.2%) in the pool of credit outstanding in the economy. This comes after a 0.3% rise in December and monthly falls late last year. Housing credit again led the way, rising 0.7% in January despite the winding back of the government’s expanded first home owners’ grant. Personal credit rose 0.5%, the sixth straight monthly gain.

Business credit fell in January for the 12th consecutive month, but at least the rate of decline has slowed dramatically. Credit to business fell only 0.1% last month after falls of more than 1% per month over the closing months of 2009. These declines reflect the banks squeezing medium and small businesses, in particular. The top end of the corporate town has access to capital markets, which well and truly are open for business.

Still, despite the better than expected gain in January, annual growth in credit outstanding remains well below nominal growth in the economy at just 1.3%oya, down from 1.5% in the year to December. Aside from even weaker outcomes in October and November last year, this is the weakest rate of expansion since the recession of the early 1990s.

For the RBA Board meeting next week, futures market pricing implies the decision will be something of a coin toss, with traders placing the probability of a 25bp rise at 48%. Our forecast is that the RBA will leave policy steady on Tuesday although, like that of the market, our level of conviction is low. The case for a further rate rise is convincing, but it was even stronger back in February when the RBA bucked unanimous expectations for a fourth straight hike.
The main reason for that "on hold" decision, which the RBA described as “finely balanced”, seems to be that Board members were uncertain about how households were coping with the three rises delivered late in 2009, rises the Aussie banks “supersized”. These clouds of doubt remain, as does the apparent anxiety about some of the tail risks associated with recent global events.

So, on balance, we are sticking with our “on hold” call. It is clear, though, that Australia's cash rate is too low; it will be at least 100bp higher by the end of the year. Our lot as economists, though, is to pick the precise timing of the rate rises as well as their size. Getting the timing right, as we found in February, is harder than it seems.

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