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Lending has increased, but consumers continue to minimize debt

October 25, 2009

Despite the fact that borrowing rebounded in January consumers still continue to reduce their debt as fears of a recession loom.

According to data released by the Reserve Bank of Australia on Friday, total private sector credit rose 0.6 per cent in January from 0.2 per cent decline in December.

The annual pace of growth fell by 0.4 percentage points to 6.1 per cent in December, the slowest since March 1994 and below the 16.4 per cent peak in December 2007.

David De Garis NAB's Capital senior economist has stated that there was more life in credit growth than many feared despite the annual place continuing to slow. Mr. De Garis went on further to say that it was obvious that the RBA would think that the slowdown in credit growth had eased off and that maybe last month's outright contraction might yet be the outlier.

Borrowing for personal purposes, which included credit cards, margin loans and personal loans, decreased by 0.2 per cent in January.

Helen Kevans JP Morgan's economist stated that the monthly decline in personal credit was the lowest since June 2008, yet anticipated more falls with tighter access to credit, cheaper assets and low confidence. Ms. Kevans also mentioned that the wealth destruction occurring in the highly leveraged household sector has encouraged a large portion of the population to pay down debt and/or boost precautionary savings, rather than take on additional loans.

Demand for housing finance rose 0.5 per cent in January with the annual growth rate slowing to 7.4 per cent from 7.7 per cent in December. It was the weakest annual rate of growth since February 1983.

Sevanth Sebastian Commsec's economist said that the effect of the RBA's interest rate cuts since September was starting to flow through to home loans, and that falling interest rates and an improved deposition by first home buyers has seen a marginal improvement in credit for owner occupied housing.

Business credit rose 0.7 per cent in the month, and increased 6.8 per cent in the year. Alex Joiner ANZ's economist stated that the increase in business credit supported the 6 per cent rise in Capital spending during the December quarter.

However it was anticipated business credit growth would remain under consistent pressure through the year, despite lower interest rates as the domestic economic environment continues to soften.

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Lending has increased, but consumers continue to minimize debt

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