The pace of lending to the non-bank private sector by financial institutions in Australia has been trending down since October 2015. It appeared to have stabilised in the September quarter of 2018 but the annual growth rate then continued to deteriorate through 2019, despite some optimism emerging in the housing market following the re-election of the Coalition Government in May of that year.
According to the latest RBA figures, private sector credit grew by +0.2% in December, in line with expectations as well as November’s +0.2% increase. The annual growth rate remained unchanged at 2.4%, with the increase spread almost evenly between lending to owner-occupiers, investors and business.
Westpac senior economist Andrew Hanlan put the figures into a broader context. “Currently, credit growth is around historic lows and compares with the cycle lows of 0.8% in November 2009, associated with the GST, and -1.8% in April 1992, associated with the recession of the early 1990s.”
Local financial markets reacted by sending bond yields lower, ignoring slightly higher US bond yields in overnight trading. By the end of the Australian trading day, the 3-year Treasury bond yield had slipped 1bp to 0.61%, the 10-year yield remained unchanged at 0.97% while the 20-year yield finished 3bps lower at 1.35%.
Despite generally lower yields in the bond market, prices of cash futures contracts moved to lower expectations of another rate cut. By the end of the day, February contracts implied a 14% chance of a 25bps rate cut, down from the previous day’s 16%. March contracts implied a 44% chance of a cut, down from 47%. However, April contracts implied an 81% likelihood while May contracts continued to imply another cut as a certainty.