Australia | Sep 30 2008
By Chris Shaw
With the proposed bailout of the US financial system being rejected overnight the Reserve Bank of Australia (RBA) has had little choice but to continue with its program of pumping liquidity into the Australian financial system, today adding almost $2 billion in repurchase agreements above the usual daily requirement of around $1.87 billion.
But adding liquidity is unlikely to be enough on its own and the market is even more convinced further cuts to official interest rates are coming, with speculation now centred on a 0.5% cut to the cash rate when the RBA meets again next month.
Economic data released today supports such a view, as while a 0.5% increase in credit growth met the market’s expectations personal credit growth fell 0.4% to its lowest levels since the 1990s recession and the 0.4% increase in housing credit growth was not enough to prevent it from dropping to its weakest level since 1983.
The bright spot in the data according to Westpac Bank was the resilience in business credit, where a 0.9% increase in July was followed by a 0.6% increase in August and shows business investment spending continues to track higher despite the weakening economic fundamentals both in Australia and globally.
But Commonwealth Bank senior economist John Peters disagrees and suggests the latest developments in the global economy leave the scene set for a period of weak business credit growth as the credit crunch will force lenders to reassess credit standards and borrowers to reassess their credit requirements.
In the view of ANZ senior economist Katie Dean, today’s data means there is now a chance the housing sector will remain weak for longer as global credit conditions remain tight and the Australian economy continues to weaken, which is helping to keep investor interest in the property market at bay.
Following today’s economic data, Dean suggests there is little choice now for the RBA but to cut rates by 0.5% next month, while TD Securities senior strategist Joshua Williamson has retained his call of a 0.25% easing. He does accept that the risk of a 0.5% cut has increased, as while retail sales rose 0.6% for August, there is an increased chance expectations for coming months will be revised lower, while the lack of approval for the US bailout package also increases the chances of a larger move by the RBA.
Commonwealth Bank sides more with the TD Securities view and expects a 0.25% cut in interest rates in the near-term, with the RBA to remain on an easing bias for some time after that given the risk in credit growth remains clearly to the downside in the current environment.
Belying the trend was a stronger than expected retail sales figure for August of a 0.3% gain against a consensus of a 0.1% gain. However economists are paying little attention to this disparity, noting September is the month when economic turmoil began to increase once more.