Default machine cranks into gear

The only real surprise in the quarterly statement on monetary policy published by the Reserve Bank of Australia yesterday was the starkness of the concluding sentence in the introduction to this regular survey of economics and markets.

"The risk of inflation remaining uncomfortably high for some time is considerable," the RBA wrote. "Absent a further shift in economic risks to the downside, therefore, monetary policy is likely to need to be tighter in the period ahead."

The language is usually less clear cut than this, but has to serve a purpose on this occasion: the current cycle of tightening of monetary policy in Australia must involve a lot more than one or maybe two more incremental rises of 25 basis points in the cash rate (currently at seven per cent). Unfortunately the RBA does not spell out just how high cash rates need to go, and how high unemployment needs to go, to drag inflation back under three per cent.

Still, there is movement in the credit market to suggest that the dynamics of robust consumer demand are not as telling as they were.

Veda Advantage yesterday published its own quarterly indicators of activity in the consumer credit market. These show that in the half year to December 2007 the number of credit card and personal loan applications fell by two per cent to 3.19 million, or around 70,000 less than the corresponding period in 2006.

The firm said the number of payment defaults during calendar 2007 increased 36 per cent compared with 2006. Veda did not put a dollar value on the level of defaults.

Meanwhile monthly data on housing finance from the Australian Bureau of Statistics confirms that banks continue to take market share in home lending from others. Banks accounted for 86 per cent of all loans during the month, which CommSec said was the highest percentage since August 1995.

Refinancing of home loans is the strongest growing category, up five per cent in a month compared to overall growth in the market of 0.6 per cent during December.