Bank lending will get tighter, warns RBA

THE Reserve Bank has warned that banks will make borrowing harder as part of the process of reining in excess growth in the economy.

Bank lending will get tighter, warns RBA

THE Reserve Bank has warned that banks will make borrowing harder as part of the process of reining in excess growth in the economy.

Dr Malcolm Edey, the RBA's third-in-charge, said tighter bank lending standards would help to reduce the overheating of the economy caused by soaring prices for commodity exports such as iron ore, coal and wheat.

"Domestic demand last year developed a good deal of momentum and one of the major drivers of Australia's recent growth, the rising terms of trade, looks set to strengthen further,'' he told a Sydney conference yesterday.

"On the other hand there are dampening factors at work, including higher interest rates and tighter lending standards in the domestic economy as well as the slowdown under way globally.''

In lifting its cash rate by 25 basis points to 7.25 per cent on Tuesday, the Reserve Bank pointed to early signs that domestic spending was starting to moderate.

Adelaide Bank has already lifted its wholesale mortgage lending rates by 40 basis points, becoming the first bank to move by more than the Reserve Bank's 25 basis point rise.

"Taking into account yesterday's decision, the cash rate has increased over the past year by 1 per cent, while the bill rate is up by about 1.5 per cent,'' Dr Edey said. "Banks have been responding to the higher funding costs by increasing their lending rates.

"They've also tightened their lending standards to risky borrowers and that process may have further to go.''