Lending growth softens, tame business inflation: CommSec's Craig James

Lending growth softens, tame business inflation: CommSec's Craig James
Lending growth softens, tame business inflation: CommSec's Craig James

GUEST OBSERVER

The last of the inflation reports – the producer price indexes – confirms the absence of inflationary pressures. 

The Reserve Bank Board can feel comfortable in cutting rates next Tuesday. The headline consumer price index showed annual growth at 17-year lows, underlying inflation is at record lows, imported consumer prices have fallen the most in four years and annual business inflation is standing at just 1.0 per cent.

The average of preliminary, intermediate and final demand indexes of domestic producer prices averaged growth of just 0.4 per cent in the June quarter – matching the consumer price headline and underlying readings.

The weak lending data removes yet another barrier to the Reserve Bank cutting rates. We can’t read too much into the result as Brexit and the Federal Election may have influenced lending intentions. But a fall in both personal and business lending is not a good look – especially with interest rates already so low. It was the smallest monthly lift in credit in 33 months. It was the biggest annual fall in personal loans in almost four years. And it was the biggest monthly fall in business loans in 3 1⁄2 years.

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Lending growth softens, tame business inflation: CommSec's Craig James

What is the importance of the economic data?

Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

The producer price figures are important in flagging price pressures at an early stage. If business costs are rising, the risk is that these will be passed on in terms of higher prices of final consumer goods. The Consumer Price Index is regarded as the key gauge of economy-wide inflation. 

Craig James is the chief economist at CommSec.

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