Banks to cut costs to maintain profits

AUSTRALIAN credit growth remained sluggish in May as house prices continued to slide, reducing the pressure for higher interest rates that has been building up in recent months.

Total credit to the private sector rose a seasonally adjusted 0.3 per cent in May from April, and rose 3.1 per cent from a year earlier, the Reserve Bank of Australia said today. Credit growth was flat on-month in April.

At the same time, housing sector credit rose 0.5 per cent on-month in May and business credit rose 0.1 per cent, having fallen 0.5 per cent in April, the central bank added.

The data may encourage economists to push back their forecasts of when the central bank will next hike interest rates to the fourth quarter.

The central bank has held its cash rate target at 4.75 per cent since November 2010 as an uncertain global environment and weakness in Australian housing and consumer sentiment kept it from lifting rates.

Banks still borrow enough from overseas to make it a worry, with ratings agency Standard & Poor's viewing their reliance on those markets as a "soft spot" that needs close monitoring.

That was unlikely to cause S&P to cut the big four banks' double-A credit rating, a measure investors use to judge the safety of a borrower.

The Reserve Bank of Australia also has confidence in the local banks, with assistant governor Guy Debelle saying that they are less vulnerable to global financial shocks than during the 2008 credit crisis.

He added that the Reserve Bank could bail them out more easily than its overseas counterparts if another crisis struck, because most Australian bank borrowing was in Australian dollars.

Additionally, interest rates in overseas markets are now less likely to suddenly rise after Greece's parliament approved budget cost cutting measures in exchange for a 28.4 billion euros ($A38.93 billion) payment from the European Union and International Monetary Fund.

So far, Europe's debt crisis has not caused interest rates to rise substantially for NAB, chief executive Cameron Clyne told a business lunch on Tuesday.

Local banks had very little to no direct dealings in Greece, but a default by Greece or another European country could cause interest rates to rise across the board as lenders worried that they're money was at risk of not being repaid.