Despite an increase in interest rates on June 8, money-supply numbers for June, published by the Reserve Bank on Monday, showed little impact of a slowdown in demand and raised the spectre of a definite rate rise on Thursday.
“Although lower than May’s 24,2%, and slightly below market expectations, June’s year-on-year M3 growth, at 23,07%, remains high. Private-sector credit extension [PSCE] growth of 23,89% in June was above market expectations and indicates continued strong demand for credit by the private sector, despite an increase in interest rates in June,” said research house RLJP.
“Given that a rate hike at the next monetary policy committee [MPC] meeting on August 3 is just about a certainty, Monday’s M3 and PSCE numbers will not materially affect the decision. However, continued strong growth in M3 and PSCE will likely provide the governor of the Reserve Bank with further rhetorical ammunition to justify such a hike,” the researchers said.
“Today’s M3 and credit numbers, together with last week’s higher-than-expected inflation numbers, supports Standard Bank’s view of a 50 basis-point hike at this week’s MPC meeting,” said Goolam Ballim, chief economist at Standard Bank.
Efficient Research economist Nico Kelder added that the money supply and private credit data for June released by the South African Reserve Bank (SARB) was slightly worse than expected.
“This disappointing number makes it almost certain that the SARB will raise rates at all of the remaining MPC meetings this year. Although interest rates were increased in June, the effect of this increase will not yet be reflected in the June money-supply data as it takes some time for the rate increase to influence credit decisions,” Kelder said.
RLJP added that, having topped 20% for five consecutive months now, policymakers will be aware of the potential inflationary impact of excess liquidity in the economy.
“Continued strong growth in M3 will keep the Reserve Bank cautious on monetary policy, and the growth in monetary aggregates could inform the timing, if not the magnitude, of further hikes down the line.
“However, as long as inflationary pressures in the South African economy remain a supply-side phenomenon and hinge importantly on international markets, money-supply growth is less likely to be a decisive factor than a contributing factor to monetary-policy hawkishness,” they said.
RLJP said July will be the first full month since June’s rate hike in which the private sector faced higher interest rates.
“It will be interesting to see to what extent the 50 basis-point hike dampened credit demand. The MPC will surely want to ensure that consumers, the primary drivers of growth in the past number of years, experience a soft landing. They will need to be careful not to raise rates too aggressively in the face of unpredictable global inflation pressures, putting the brakes on demand which could lead to a potential stagflationary economic environment,” the researchers said.
M3 was expected to have eased slightly to 23,3%, a survey of economists by I-Net Bridge found. The rate of growth PSCE was expected to have increased marginally to 22,85%.
What Monday’s data showed
Growth in M3 money supply
June: 23,07%
May: 24,2%
April: 23%
Growth in private-sector credit extension
June: 23,89%
May: 22,7%
April: 23,2%
— I-Net Bridge