Australian Credit Growth Rebounds on Deep Rate Cuts

Australian private sector credit rebounded in January, helped by robust demand for loans from businesses and home buyers, adding to the case for a pause in the feverish pace of interest rate cuts next week.

Figures from the Reserve Bank of Australia (RBA) on Friday showed total credit rose by 0.6 percent in January, well above a forecast 0.2 percent rise. That marked a bounce from a 0.2 percent fall in December -- the first contraction since 1992.

The RBA holds its monthly policy meeting on March 3 and the market has been divided on whether it will ease again, having already cut by a massive 400 basis points since September to a record low of 3.25 percent.

There is growing speculation the RBA may hold rates as it seeks to assess events after the sharp reductions and significant fiscal stimulus from the federal government.

"We still think the RBA will cut by 50 basis points next week, but it's more evidence that a pause is not too far away, even perhaps next week," said David de Garis, senior economist at National Australia Bank.

Credit growth for the year remained sluggish, slowing to 6.1 percent, its slowest pace since March 1994.

Finance for businesses rose 0.7 percent, while lending for housing rose by 0.5 percent as the aggressive rate cuts so far and generous government handouts to first home buyers lured Australians into the property market.

Still, with the outlook for global growth grim, financial markets are pricing in a further quarter percentage point cut next week and a slight chance of a 50 basis point cut.

Investors have pared expectations of a half a percentage point move after RBA Governor Glenn Stevens said last week the central bank had been pre-emptive in cutting rates and the effects are yet to be seen in the data, though they are being felt in businesses around the country.

Indeed, fourth-quarter capital spending by businesses released on Thursday showed a surprise jump, lifting expectations that the Australian economy had escaped an outright contraction in the fourth quarter.

Business investment accounts for only 10 percent of Australia's A$1 trillion in gross domestic product (GDP). The fourth-quarter GDP report is due on March 4 and analysts had feared it would show a contraction of around 0.2 percent.

More From CNBC.com

• Singapore's Prime Minister Braces for Tough Year
• Japanese Factory Output Slides, New Jobs Dry Up
• JPMorgan Job Cuts Increase, Number Now is 14,000
• More Asia Pacific News

"Today's release adds to the mixed nature of the recent domestic data and will likely fuel speculation that the RBA may pause next week," said Su-Lin Ong, senior economist at RBC Capital.

"However, we continue to think that the dismal global data prints since the last board meeting, developments in European banking, and a step up in high profile job cuts in Australia justifies a modest 50 basis point cut next week. It is shaping up as a finely balanced decision."

Copyright 2009 Reuters. Click for restrictions.