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South Africa: Small Dip in Credit Keeps Heat on Rates
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Business Day (Johannesburg)
2 October 2007
Posted to the web 2 October 2007
Thabang Mokopanele
Johannesburg
GROWTH in private sector credit demand dipped in August but was stronger than anticipated, while money supply accelerated, adding to pressure for another interest rate hike at the Reserve Bank's policy meeting next week.
Credit demand rose 22,9% in the year to August, just below 23,13% in July, while annual growth in the broad M3 measure of money supply quickened to 25,80% from 24,46% in July -- its fastest since March last year.
Consensus forecasts from a Reuters poll had predicted that private sector credit extension (PSCE) would slow to 22,73% while annual growth in M3, which often points to inflationary pressures in the economy, was seen growing 24,4%.
Economists said that although the modest slowdown in credit demand should be comforting to the Bank, it would not have much bearing on its interest rate decision, which would focus on the still bleak inflation outlook.
"Having delivered 300 basis points in rate hikes, we expect the central bank to be happy now with slowing demand," said Absa Capital economist Monale Ratsoma.
"However, based on the need to manage inflation expectations, contained in the bank's recent rhetoric, we expect a 50 basis point rate hike when the monetary policy committee meets next week," he said.
The Bank has gradually raised its key repo rate to 10% -- a four-year peak -- since June last year in a bid to contain price pressures, curbing domestic demand, the economy's main engine of growth.
Inflation has nonetheless breached the top of its 3%-6% target range for five months in a row. It is expected to climb further, to peak at about 7% next year on the back of rising fuel and food prices -- both global trends which monetary policy cannot address.
But the Bank stressed last month it would "act decisively" both to contain more generalised price pressures and to manage inflation expectations, which tend to become a self-fulfilling prophecy.
"The slight cooling of PSCE over the past two months is a welcome development," said Efficient Research economist Fanie Joubert.
"However, it remains unclear if these positive developments will be enough to prompt the Bank not to raise interest rates further... its primary mandate is inflation targeting."
In the past, the Bank has cited robust domestic demand for goods and credit as one of the threats to inflation. There has been growing evidence of a slowdown in consumer demand, but credit growth is still uncomfortably strong.
Annual growth in the core measure of PSCE -- which includes leasing finance, instalment sales and mortgage advances -- edged up to 23,2% from 23,02% in July.
That component makes up more than 60% of the indicator and reflects mainly private sector demand.
Annual growth in other loans and advances, which reflects mainly corporate borrowing, slowed sharply to 28,7% from 32,6%. Standard Bank said in a research note that stricter lending conditions driven by higher interest rates and the implementation of the National Credit Act in June would put more pressure on private sector credit growth in the final quarter of this year.
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"This implies that a more substantial slowdown in the credit numbers are expected to play out only in the September data which will only be available at the end of this month," it said.
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