Australian private sector credit shrank for the first time since 1992 in December as foreign banks cut lending to local companies amid the global credit crunch, backing expectations of a big interest rate cut next week.

A weakening housing market and falls in commodity prices have also added to the slowdown, with growth hitting an eight-year low in the third quarter and prompting the central bank to slash rates by 3 percentage points since September to 4.25 percent.

Figures from the Reserve Bank of Australia (RBA) on Friday showed total credit fell by 0.3 percent in December, well below a forecast of a 0.5 percent rise, after rising 0.4 percent in November. Growth for the year slowed to 6.7 percent, its slowest pace since April 1994.

Finance for businesses fell 1.1 percent, the first decline since December 1992, while lending for housing rose a modest 0.4 percent as the threat of the economy slipping into recession saw Australians reduce their willingness to borrow.

"The poor breakdown supports another large rate cut next week," said Su-Lin Ong, senior economist at RBC Capital.Under pressure and facing a squeeze on margins, businesses are clearly not expanding and have little appetite for debt and growth."

Indeed, a Reuters poll of 20 analysts on Friday found the RBA was expected to cut its key cash rate by 100 basis points to a record low of 3.25 percent when it meets on Feb. 3. [nSYD282907] The futures market <0#YIB:> is pricing in the cash rate at 2.5 percent in March, having factored in a reduction to 3 percent a month earlier.

But in recent days, grim economic figures from Australia's major trading partners -- China, Japan and South Korea -- posed a serious threat to both exports and business investment this year, raising the threat of a prolonged recession.

That is likely to see the RBA opt for a more aggressive easing of monetary policy."In our view, RBA officials would rather risk overdoing the policy easing by moving early and aggressively, than moving too little too late," said Stephen Walters, chief economist at JP Morgan. "Being overly cautious risks the economy dropping into a destructive, deflationary spiral of even more aggressive job cuts and collapsing activity; this argues strongly in favour of the RBA frontloading the policy easing.MORE STIMULUS ON THE WAY.

Australia's central bank has already chopped rates by 3 percentage points since September, while the federal government has stepped in with a A$10.4 billion ($8.85 billion) stimulus package, the bulk of which flowed into consumer pockets in December.Late last week, the government launched a A$4 billion fund in partnership with the country's four major banks to help commercial property investors refinance foreign bank loans they are unable to roll over.

Foreign banks hold more than half of the A$285 billion in syndicated loans issued to Australian businesses since 2006.They have not yet stopped lending, but are strapped for cash and the government fears that if foreign banks did pull out it would spark a credit shortfall and send the economy into a tailspin.

There has also been growing speculation this week that a second stimulus package from the federal government is in the works. [nSYD383174]."Today's data reinforce our view that the policy response to the global economic downturn needs to be fired up further," said Stephen Halmarick, co-head of economics at Citi.

"We expect more measures to address credit availability for businesses, 100 basis point of easing next week by the RBA, accelerated income tax cuts and increased spending by the Commonwealth and state governments."