Fall in lending helps keep the economy from overheating, Reserve Bank says

A DOWNTURN in lending to households and businesses is keeping the lid on an economy supercharged by the resources boom, says the Reserve Bank.

A DOWNTURN in lending to households and businesses is keeping the lid on an economy supercharged by the resources boom, says the Reserve Bank.

In a generally upbeat assessment yesterday, RBA deputy governor Ric Battellino acknowledged the challenge of keeping inflation in check as the economy cranked up, expected to grow from its current rate of 3.25 per cent to up to 4 per cent over the next two years.

But he said the RBA was reassured by the slowing growth in household credit as well as the "more cautious" approach people were taking to debt.

In the hangover from the GFC, business credit had fallen by 4 per cent in the past year, but this had not weakened economic activity, Mr Battellino said.

He played down the prospect of Australia being hit by another wave of financial instability from the US, saying "as far as I can tell no such episode exists".

Mr Battellino told a business function in Brisbane that the Australian dollar's rise to near-parity with the greenback would ease some of the pressure on interest rates, but it was only one factor taken into account by the RBA in setting them.

"There's no one-for-one trade between interest rates and the Australian dollar," Mr Battellino said.

But he renewed the warning by his boss, Glenn Stevens, that the RBA would have to push up the official rate should economic growth kick along as forecast.

"Earlier this year the Reserve Bank board returned official interest rates to a level that is consistent with lending interest rates being close to their average levels," he said.

"Having done so, we have been comfortable to leave official interest rates unchanged in recent months.

"However . . . if economic conditions evolve as currently expected, it will be likely that higher interest rates will be required at some point to ensure that inflation remains consistent with the medium-term target."

The RBA this week left on hold its cash rate -- the interest it charges banks to borrow from it and generally passed on to their customers -- but Mr Battellino's comments will reinforce expectations of rises in the coming year.

This could add more than 100 basis points -- 1 per cent -- to the existing cash rate of 4.5 per cent, lifting standard variable home loan interest rates above 8 per cent.

Mr Battellino said domestic spending was expected to drive domestic economic growth and push underlying inflation to about 3 per cent by the first half of 2012, at the top end of the RBA's target range.

The bank, however, was satisfied with the level of household debt.

"The current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt," he said.

Mr Battellino said the impact of the so-called two-speed economy -- characterised as the rampant resource sector and the rest -- was overestimated.

"At the moment . . . the resource states are not doing all that well," he said. "Queensland in some ways is lagging the other states, and it's the centre of the resource industry.

"The difference between the performance of the states is not unusually large and so I think people do overstate the extent of those problems.

"Here in Australia, I think there's less of a problem than in some other countries.

"The US has much bigger dispersion across the states than we have and even Europe, at the moment, where you see a range of outcomes between some countries, like Greece and Iceland, and Germany.

"So it is an issue, but its not an issue unique to us."