Australians Busy Borrowing and Building in September

Australian businesses were busy borrowing in September despite interest rates at decade highs, while a jump in approvals to build new homes provided a tentative sign of a recovery in housing construction.

Investors took Wednesday's firm data as only adding to an already compelling case for a further rise in rates and pushed the Australian dollar higher while dumping bonds.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting next Tuesday and the market is pricing in a 91 percent chance that rates will be hiked to an 11-year high of 6.75 percent given recent alarming figures on core inflation.

The RBA had already tightened policy in August, but with underlying inflation accelerating to 3.0 percent for the year to September, the very top of its 2 to 3 percent target band, analysts felt another move was almost inevitable.

"We expect core inflation to settle on the wrong side of the RBA inflation target by early next year, and in an environment of still strong domestic growth, rising commodity prices and easy fiscal policy, we expect the RBA to hike next week, and again in February," said Scott Haslem, chief economist at UBS.

Despite the August hike, credit in the private-sector climbed 1.2 percent in September, beating forecasts of a 1.0 percent gain and leaving growth for the year at a brisk 15.9 percent.

Business borrowing led the way with a hefty 2.0 percent increase, taking growth for the year to a torrid 23.3 percent.

"It points to still strong business investment," said Su-Lin Ong, a senior economist at RBC Capital Markets. "That will be good for productive capacity in the long run, but right now it just underlines how robust the economy is." "The question is not whether rates will rise next week but whether a further increase will be needed beyond that," she added. "We suspect it will

The market seems to agree with bill futures fully priced for a tightening to 7.0 percent by March next year. Still, Ong did detect signs the RBA's four hikes since May last year were cooling the appetite for housing debt.

Mortgage credit rose by a relatively modest 0.8 percent in September, while annual growth slowed to 11.7 percent, from 12.1 percent in August and 14 percent at the end of 2006. That was the slowest annual pace since November 1998 and could reassure the RBA that its interest rate weapon still had some bite.

While the demand for mortgages seemed to be moderating, the supply of new housing finally looked to be turning up after a couple of years of weakness.

Approvals to build new homes rose 6.8 percent in September, handily beating market forecasts of a 0.7 percent increase and lifting growth for the year to 4.2 percent.

That was matched by a 6.7 percent rise in the value of buildings approved to A$6.1 billion (US$5.6 billion), while the value of renovations and additions jumped over 10 percent.

A revival in construction would be warmly welcomed by potential home buyers as a growing population is putting upward pressure on rents and prices.

"The overall trend in building approvals is turning positive, under-pinned by tight rental markets and a strong labor market, which presents some upside potential for dwelling investment growth in the year ahead," said Spiros Papadopoulos, an economist at nabCapital.

"The strength in housing markets across the country and the ongoing surge in business credit strengthens the case for further RBA action," he concluded.