By Eric Johnston
THE Reserve Bank is tipped to cut interest rates by as much as 1 percentage point next week in a bid to kick-start demand.
Lending to business and consumers fell for the first time since 1992, mainly due to companies shelving investment plans on fears of a bleak outlook for the global economy.
Adding to worrying signs, the amount of new credit in the economy is coming to a standstill. New figures show a clutch of US and European banks cut back lending in Australia last month.
However, the data is yet to reveal a wholesale pull-out, with some offshore banks actually growing their loans book over the past month.
The focus on offshore lending follows the detailing of a plan by the Federal Government and the nation's Big Four banks last week to establish a $4 billion lending vehicle aimed at keeping credit flowing in the commercial property sector.
The plan follows broader concerns that several global banks could curb lending in Australia as their troubled parents attempt to take capital back home to ease pressure on their balance sheet.
Some speculate that such a move could leave a lending shortfall of more than $70 billion, which local banks would struggle to meet.
US lender State Street and European majors BNP Paribas, UBS and Barclays Bank were among those that have cut back on lending over the past year, according to monthly figures compiled by the Australian Prudential Regulation Authority.
But this shortfall was taken up by local banks and offshore players such as France's Societe Generale and Germany's Deutsche Bank.
Slowing credit growth represents an additional headache for the major banks, with profits under pressure from rising bad debts.
Speculation is also growing that the Federal Government is planning a second stimulus package on top of the $10.4 billion spending program handed down in October.
Still, demand for credit appears to be falling off faster than expected.
Figures from the Reserve Bank yesterday showed total credit fell by 0.3 per cent in December, well below a forecast of a 0.5 per cent rise, after rising 0.4 per cent in November. Growth for the year slowed to 6.7 per cent, its slowest pace since April 1994, which JPMorgan chief economist Stephen Walters said was in "stark contrast to the 16 per cent-plus rates at the start of 2008".
Lending to business fell 1.1 per cent in December from November, mostly as investment plans continued to be scaled back, postponed and cancelled amid growing expectations of much weaker global demand, Mr Walters said.
Despite the Federal Government doubling of the first home buyers grant to $14,000, housing credit remains soft, growing only 0.4 per cent month on month, compared with 0.5 per cent previously.
Growth in personal credit continued to slip, falling 1.1 per cent in December after straight months of 1.5 per cent declines, reflecting slumping consumer confidence levels.
The latest figures also reflect a large number of households choosing to pay down debt while interest rates were low.
Mr Walters said recent interest rate cuts should help provide a floor under demand for credit, with more cuts in the pipeline when the central bank holds its board meeting next week its first monthly meeting for the year.
"The RBA has delivered a mammoth 3 per cent of policy easing since September, the most aggressive series of official rate cuts since the 1990-91 recession," he said.
"We expect further assertive policy easing, with another 100-basis-point cut to the official cash rate forecast next week."
Such a cut would take official cash rates to 3.25 per cent, the lowest since the RBA began to target it in the early 1990s. The last time overnight money market rates were this low was in 1960.
Meanwhile, monthly banking data show the major banks continue to tighten their grip on the nation's deposit market. Commonwealth Bank led the majors, growing its deposit base by 3.3 per cent, NAB grew by 0.6 per cent while Westpac's total deposit base was up slightly. Bucking the trend, ANZ's total deposits shrank 3.5 per cent in December.
BankWest managed to reverse its deposit outflow following its acquisition by CBA. But Dutch-backed ING continued to suffer an outflow, with its deposits down 4 per cent over the month. In October, the Rudd Government introduced a deposit guarantee program for the nation's banking system.