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Slow credit growth helps rate-cut case

AAP logoAAP 31/10/2016 Garry Shilson-Josling, Economist

If the Reserve Bank surprises economists with an interest rate cut on Tuesday, Monday's figures confirming a slowing trend in credit growth will be part of the rationale.

Most economists expect the RBA to keep the cash rate at 1.5 per cent at its monthly board meeting but not all would be surprised by a cut to 1.25 per cent.

Of 14 surveyed by AAP, three - Commonwealth Bank's Michael Blythe, St George Bank's Besa Deda and Citi's Josh Williamson - thought a cut was more likely than not.

If their tentative predictions of cut are vindicated, it will be thanks to blockages in the two main channels for the transmission of monetary policy.

One of those channels is the exchange rate.

A lower cash rate is supposed to reduce the appeal of Australian dollars to investors looking for somewhere to park their cash.

But interest rates in the other major markets - the US, Japan, the euro area and the UK - are even lower so the Aussie dollar is still about where it was, on average, against the major currencies in early 2015.

That's despite four interest rate cuts.

The other transmission channel is credit growth.

Low interest rates ought to encourage borrowing and, in turn, investment and consumer spending.

But the weight of existing debt, along with slow wages and employment growth, have lowered the ceiling on consumer spending and a looming slowdown in housing construction threatens to lower it further.

And the lacklustre economic environment has meant business investment, even outside the mining sector, is struggling to make headway.

The RBA's credit aggregates figures on Monday just added more evidence that low interest rates have lost traction.

The 0.4 per cent increase in the value of debt on the books of Australian lenders between August and September was in line with the average of the past five years.

But, considering the cash rate started the past five years at 4.75 per cent and ended it at 1.5 per cent, it shows the cuts so far have, at best, done little more than hold the line on credit growth.

In fact, the trend appears to be slowing.

Credit growth over the past year was 5.4 per cent, slower than the previous year's 6.4 per cent.

And the latest six months, with an annualised pace of 4.6 per cent, were slower still.

These trends are a strong argument for another rate cut but the counter arguments are strong.

For one thing, if the cuts so far have been so ineffective, there seems little point in trying again.

And the risks of igniting the already-overheated housing market are real, with CoreLogic on Monday reporting the fourteenth consecutive week of auction clearance rates above 70 per cent.

What's more, the RBA has reported hints in the data that wages growth, a key driver of inflation, is picking up.

That case for a wait-and-see stance still appears a bit stronger but trends in credit mean no one can be sure.

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