Private sector credit in Australia expanded by 0.6 per cent in July, below the 0.7 per cent growth analysts had anticipated, the Reserve Bank of Australia reported on Friday. Borrowing growth remained positive on a monthly basis, though the pace has continued to ease as households and businesses hold back spending in response to high interest rates and ongoing cost-of-living strains.

Compared with a 0.4 per cent expansion recorded in June, the latest monthly data point to a modest pick-up in borrowing activity, even as the broader year-on-year rate of credit expansion has been easing. In the twelve months through July, lending to the private sector grew at an annual rate of 4.8 per cent, a modest easing from the 5.1 per cent recorded a month earlier.

The slowdown reflects the accumulated effect of the RBA's sustained interest rate increases, which have brought the cash rate to 4.35 per cent — its highest level in 12 years. Housing credit, the largest segment, edged up 0.5 per cent in July — matching the prior month's pace — while personal lending advanced 0.7 per cent and business borrowing expanded 0.8 per cent.

Incremental upticks across all lending categories point to a pattern of measured credit appetite, with households channelling funds toward savings rather than debt and businesses holding off on growth investments.

Weaker-than-forecast lending figures are expected to support the Reserve Bank's measured approach to interest rate settings. Inflation remaining above the Reserve Bank's 2–3 per cent target range has kept the board oriented toward tightening, though a softening in loan demand may reduce pressure on the economy from overheating.

Analysts describe the deceleration in lending as a trailing measure of stricter borrowing conditions, with the full effects of previous interest rate increases potentially taking additional months to materialise. Restrained lending activity across the broader economy tends to hold back household spending and business investment, placing downward pressure on overall output growth. Lowering overall spending in the economy may also ease upward pressure on prices.

The RBA's forthcoming policy gathering in September will be closely observed by investors for any adjustments in tone that might hint at a move toward lower borrowing costs.

Reduced lending activity among households and businesses points to a growing preference for financial restraint. Elevated borrowing costs have led a number of prospective buyers to put off purchasing property, while those already holding home loans are reported to be prioritising debt reduction. Companies in rate-sensitive industries such as construction and retail are deferring borrowing decisions until there is greater certainty about the economic trajectory.

Analysts indicate the pattern is set to continue over the short to medium term, particularly if the RBA holds interest rates steady for a prolonged stretch. Forecasts for interest rate reductions in the opening months of 2025 hinge largely on how both inflation and employment conditions evolve.

Lending to households and businesses by financial institutions — encompassing overdrafts, personal loans, and credit cards — is captured through a metric known as private sector credit. Lending activity and the overall state of the economy are closely tracked through this measure.

Monthly credit growth came in at 0.6 per cent, falling short of the 0.7 per cent projection, as elevated borrowing costs, ongoing inflationary pressures, and subdued appetite among households and businesses weighed on demand for new lending. Reduced lending activity may ease price pressures, potentially opening the door for the Reserve Bank of Australia to lower interest rates at a later stage. The institution has indicated it will evaluate a broad set of economic indicators before making any adjustments to interest rate policy.