This is pretty much the story of the Australian economy. The RBA seems to react to Bank Asset Growth. As Banks start lending too much, up goes interest rates. In the period 2000 to 2001, after the dot-com boom, Asset Growth was trending down, so interest rates got as low as 4.25%. The sharemarket bottomed in 2003, bank asset growth kicked into gear, with interest rates going to 6.25% by 2007. Excessive world growth first appeared in the Australian market in August 2007, as Bank Asset growth jumped over 10% growth per year. The RBA ratcheted rates to 7.25% by August 2008, when you may recall the first meltdown. I remember that day in August 2008 when the market range traded within a 10% band. What saved the day was that Money Supply and Bank Asset Growth continued to blow through the roof. By December 2008, Bank Asset growth peaked at 15.5% year on year, but Money Supply had already started to trend down. The RBA, recognizing the moment had dropped interest rates back to 4.25% by the end of 2008.

Bank Asset Growth bottomed by June 2003, and interest rates got as low as 3%. With a rebounding sharemarket and rebounding Bank Asset Growth, the RBA began to lift rates. As rates rose back to 4.5%, Money Supply continued to decline, and without fuel for the fire, Bank Asset Growth declined. This is where we find ourselves today. Bank Asset Growth is moribund, interest rates rises just had to stall, and Money Supply growth is barely above zero.

The media tried to put a positive spin on Bank lending commitments yesterday, but commitments are no higher than levels seen in 2006. We have been questioning why the RBA has been lifting rates this year because of zero interest rates overseas and contracting demand, but the above growth rates (or lack of) brings the RBA strategy into question. Short of a boom in Money Supply and Asset growth, continue to expect rates to remain the same, with a greater chance of a decline than otherwise. And again we will point out, any constraint in Balance Sheet expansion must impact on future Government Budget revenue, and the consequent ongoing budget deficit.