Ayanda Shezi
2 October 2006
Johannesburg — CREDIT growth climbed higher last month, rising 25% year on year, confirming that consumer spending remains strong, and strengthening the case for further monetary policy tightening.
It is early days yet, and economists expect the effects of the interest rate hikes so far this year to take effect only in the last few months of the year.
Data released by the Reserve Bank on Friday show that private sector credit extension (PSCE) grew 25,03% in August, up from 24,8% in July.
In turn, M3, the broadest measure of money supply, increased 21,4% year on year, from 21,1% in July.
"The data indicate that credit demand responded hardly at all from the June rate hike. It is too early to say whether the August rate hike would have had an effect," said Absa treasury economist Nyiko Mageza.
He said the data pointed to a need for further monetary policy tightening from the Bank. "This strengthens our view that the monetary policy committee will increase its repo rate by 50 basis points at the October meeting. We also expect a further 50 basis points increase in the repo rate in December," Mageza said.
Mortgage advances, the largest component of PSCE and the main contributor to PSCE growth over the past few months, continued to grow in August, to 30,3% year on year, up from 30,2% in July.
"Expectations of two more rate increases of 50 basis points each could act as a catalyst to the slowdown in mortgage advances in the coming months," said Standard Bank economist Shireen Darmalingam.
However, she said, the full effect of these rate increases would not be felt immediately.
Leasing finance grew 20,7% year on year, unchanged from July, while instalment sales credit slowed to 16% year on year, compared with 18,1% previously.
"August, September and October are cyclically strong months in terms of vehicle sales and are expected to support leasing finance during these months," Darmalingam said.
Furthermore, a couple of dozen new model launches were expected at the Auto Africa 2006 Expo this month, which were expected to drive vehicle sales in the last quarter of this year and into next year, she said.
Although the still-high credit figures and rising inflation have raised speculation that rates could rise higher than expected, analysts are of the mind that 200 basis points should be enough.
"For now, we do not expect any hikes in 2007 because we expect the 100 basis points of rate tightening plus the further 100 basis points expected over the rest of 2006 to rein in consumer demand," Mageza said.
"We should begin to see significant slowdown in credit demand around October. By that time, the pipeline of approved but still unregistered mortgage loans from before the June and August hikes should be clear. That is, the mortgage data would reflect post-rate hike behaviour."
However, Mageza said, should the high rates of credit demand persist then the Bank would have to tighten policy even further. Growth in asset-backed credit was expected to ease in the months ahead, said Nedbank chief economist Dennis Dykes.
"This slowdown is likely to come mainly from softer household debt as the impact of rising interest rates and sharply higher debt levels start to affect consumers."
Corporate demand for debt is, however, expected to remain robust, given the expected acceleration in fixed investment activity.
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