SA’s credit growth surges

Analysts said the effects of monetary policy tightening earlier that month had yet to filter through into the economy, and demand for credit was expected to slow in the next few months.

The credit growth figures, together with last week’s disappointing inflation data, have sealed the case for another rate hike when the Reserve Bank’s monetary policy committee met on Thursday.

Announcing a hike of 50 base points to 11.5%, SA Reserve Bank Governor, Tito Mboweni, said the bank’s inflation forecast had deteriorated moderately.

Eskom treasury economist Kabelo Masike said that the data had put the “final nail in the coffin” as far as the rate decision was concerned.

“The only prevailing debate is around the pace at which interest rates will be increased going forward. At the same time the bank was mindful not to stifle the economy by being too heavy-handed in its interest rates policy. It is all an intricate balancing act,” Masike said.

In a speech delivered last Friday at a fund-raising dinner, central bank governor Tito Mboweni hinted at further monetary policy tightening, saying that developments in recent months (including the current account, high oil prices and rising prices) demanded “vigilance on the part of the bank if the hard-fought economic gains are to be sustained”.

Figures released by the central bank show that PSCE rose 1,7 percent in the month, while M3, the broadest measure of money supply, increased R10,8 billion or 0,9 percent in the month. PSCE was up 22,70 percent year on year in May.

On a year-on-year basis, growth in M3 slowed to 23,07 percent, from 24,2 percent in May.

“The latest credit figures suggest that spending and credit demand remain exceptionally robust,” Nedbank chief economist Dennis Dykes said.

“This, together with June’s disappointing inflation figures, especially the sharp build-up in pressures on the producer side, the general deterioration in the inflation outlook and (central) bank’s changed philosophy in dealing with imbalances such as rising debt levels and a widening current account deficit, make at least one further 50-basis-point hike in prime likely,probably in October ” he said.

Standard Bank economist Shireen Darmalingam said the June rate hike had sparked some concerns, particularly for highly indebted households.

“Household debt as a percentage of disposable income is already at an all-time high (at 68,2 percent) and, should monetary policy tighten further, households may come under some pressure on the back of higher interest rates resulting in larger debt repayments,” she said.

Mortgage advances, the largest contributor to PSCE, eased slightly, rising 2,1 percent in the month, bringing year-on-year growth to 29,8 percent, from 30 percent in May.

The effect of the latest interest rate hike is expected to be most pronounced in the final quarter of this year.

“This hike – combined with the tightening of monetary policy, and another rate hike expected in October – is likely to constrain house-price growth in the second half of this year and into next year,” Darmalingam said. – Business Day.

August 2006
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