Rates rise more likely as private debt spirals

By David Uren
August 1, 2007
Article from THE AUSTRALIAN

PRIVATE debt is growing faster than at any time since the last days of the 1980s property boom, increasing the likelihood of another rate rise next week.

The $27.4 billion lift in debt in June was shared among businesses, homebuyers and high earners pumping the maximum $1 million into superannuation ahead of the June 30 deadline.

The increase in debt last month, reported yesterday by the Reserve Bank, was the fastest since November 1989, when home loan interest rates hit 17 per cent under the Hawke Labor government.

The Reserve Bank board is meeting next Tuesday and is expected by financial markets to raise its benchmark cash rate by a quarter of a point to 6.5 per cent.

"If there was not much doubt about a tightening next week, there is less after these numbers," HSBC chief economist John Edwards said yesterday.

The expected rise would push a standard mortgage rate to 8.3 per cent, the highest level since November 1996.

The Reserve Bank has used the rapid growth in borrowing as part of its justification for each of the past three interest rate increases.

Raising interest rates only lowers inflation by reducing the appetite of both business and households for debt-funded spending.

Some of the leap in borrowing in June will be reversed next month. Personal debt soared $5.5 billion in June, the biggest increase on record, as high-income earners borrowed to buy shares and managed fund units to put into their superannuation.

Personal borrowing normally rises by about $2 billion a month, and probably returned to this level in July.

However, the Reserve Bank will be concerned that home buyers are also taking on new debt at a rapid rate, borrowing $12.1 billion in June. This was the biggest monthly increase in mortgage debt since March 2004.

Business took on another $9.9 billion in debt, with the 18.7 per cent growth in borrowing over the past year the fastest since June 1989. "It's the business lending increase which will attract RBA governor Glenn Stevens's eye," Mr Edwards said.

Deutsche Bank chief economist Tony Meer said that although tax planning for the end of the financial year by high-income individuals had added to the surge of borrowing in June, there has been a steady increase in the growth of borrowing since the end of last year.

"Interest rates are not seriously dampening the appetite for borrowing," he said.

Mr Meer said the Reserve Bank was likely to raise rates at least twice over the next 12 months.

The Australian Bureau of Statistics released new home approvals figures yesterday, showing a slow recovery in building levels from the dip caused by the rate rises last year.

"The new housing sector is still struggling to gain traction under the weight of record low housing affordability," Housing Industry Association chief economist Harley Dale said.

The total number of new dwellings approved jumped by 7.5per cent in June, but this was influenced by the level of approvals for new apartments, which vary widely every month.

Trend figures calculated by the ABS show that the number of approvals for private houses has been creeping higher at a rate of just 0.2 per cent a month, while the number of approvals for apartment blocks rose by 0.8 per cent last month.