Credit indicators a brake on rates, for now

Reserve Bank governor Glenn Stevens highlighted the divergent trends in housing and business credit growth in his statement yesterday, following the RBA board meeting.

The board decided to leave the cash rate at 3.75 per cent.

Stevens said that while credit for housing was expanding at a solid pace, business credit was still falling "as companies have sought to reduce leverage and lenders have imposed tighter lending standards, and in some cases sought to scale back their balance sheets."

Stevens said the RBA's view was that "credit conditions were difficult for many small businesses." The board wants a clearer picture of how rate rises are affecting business before moving again.

The RBA's latest financial aggregates, published last week, show that business credit aggregates have been declining, on a monthly basis, since February last year. The December figure is down seven per cent, year on year.

The Australian Bureau of Statistics' most recent lending finance data show new commercial finance commitments (in trend terms) falling steadily throughout 2009 - from $29.6 billion in January to $27.2 billion in November

The theme of some recent commentary is that this trend will continue. On Monday the Council of Small Business of Australia released the findings of a survey that found higher interest rates was the top business concern.

The latest Dun & Bradstreet business expectations survey, published last month, found that 70 per cent of business expects to maintain current debt levels, 19 per cent expects to reduce debt and only seven per cent expects to take on more debt.

Thirty-one per cent of respondents to the D&B survey said they expected credit market conditions to have a detrimental impact on their businesses. That number is less than in previous surveys but it is still almost a third of businesses.

East & Partners reported in December that big business also has a reduced appetite for debt. East & Partners' survey of the top 500 companies found that fewer than a third planned to look for more debt in the first half of 2010.

Companies cited the rising cost of debt and tougher credit criteria as reasons for their reduced appetite for debt.

Counter to the trend, Veda Advantage has picked up a significant increase in demand for business credit in its latest credit demand index, published yesterday.

Veda reported that business credit demand increased 11 per cent in the December quarter.

While there are some mixed signals, it appears that business credit growth will remain subdued for the first half of 2010 and maybe longer.