Summary: Private sector credit contracts for third consecutive month in July; result primarily driven by investor and business lending; owner-occupier loans grow steadily; weak demand rather than cost of credit; business loan growth “to remain weak”; weakest results for private sector credit “since GFC”.
The pace of lending to the non-bank private sector by financial institutions in Australia has been trending down since October 2015. Private sector credit growth appeared to have stabilised in the September quarter of 2018 but the annual growth rate then continued to deteriorate through to the end of 2019. The early months of 2020 provided some positive signs; these disappeared in April.
According to the latest RBA figures, private sector credit contracted by 0.1% in July, its third consecutive month of contraction. The result was in line with expectations but more than June’s -0.2%. The annual growth rate slowed to 2.4% from June’s comparable rate of 2.8% after revisions.
“We believe it’s the weak demand for credit rather than the cost of credit that’s holding back overall credit growth,” said Citi Research economist Josh Williamson.
The result was largely driven by a large fall in investor loans, with business loans and personal debt also contracting. Owner-occupier loans continued to grow steadily.
Long-term Commonwealth bond yields moved lower, following US 10-year Treasury yields in overnight trading. By the end of the day, 10-year and 20-year ACGB yields both finished 4bps lower at 1.00% and 1.58% respectively. The 3-year yield remained unchanged at 0.32%, 7bps above the RBA’s target.
In the cash futures market, expectations of a change in the actual cash rate, currently at 0.13%, continued to remain low. At the end of the day, contract prices implied the cash rate would remain in a range of 0.115% to 0.120% through to the end of 2021.
The traditional driver of loan growth rates, the owner-occupier segment, grew by 0.4% over the month, the same rate as in June after it was revised up from 0.3%. The sector’s 12-month growth rate remained at 5.4%.