Lending forecast for individuals and businesses remains flat despite record-low interest rates

20 August 2020

The RBA is worried that people and businesses are not willing to borrow despite record-low interest rates.

In their August meeting minutes the central bank has concerns about future growth in banks’ mortgage and business loans.

“While activity in the housing market and loan commitments had picked up in recent months, the flow of new commitments had remained well subdued in the face of recent developments in Victoria and uncertainty about the economic recovery,” the RBA minutes state.

“Business lending had contracted, following strong growth earlier in the year, as large businesses repaid credit they had earlier drawn down for precautionary reasons in response to the pandemic.

“Meanwhile, lending to small and medium-sized enterprises, many of which were operating in the most affected sectors of the economy, had been little changed.

“Demand for new loans – especially from SMEs – had been low, reflecting the weak economic conditions and the unusually uncertain outlook, although the supply of credit also appeared to have tightened a little.”

Westpac’s Gary Thursby confirmed that at his bank, the general level of growth for both home lending and SME lending remained flat.

“With institutional and corporate balances, we saw those elevate in March and April, as businesses looked to secure funding lines,” he told Australian Financial Review.

“They have since paid those down, and we continue to see an outlook that is pretty flat in terms of demand for credit across business, corporate and SME.

“On the mortgage side, general demand for housing in aggregate is still fairly soft, and we expect that to continue through the rest of this year.”

RBA governor Philip Lowe says a combination of the COVID-19 pandemic and overly cautious interpretations of responsible lending were causing the drag on growth.

“We can’t have a world in which, if a borrower can’t repay the loan, it’s always the bank’s fault,” he told a parliamentary economic committee last week.

“If a bank never makes a loan that goes bad it means it’s not extending enough credit.”


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