Demand for credit by South Africa’s private sector soared by a record 27,48% in the year to October, beating forecasts and rendering another interest rate rise this year virtually certain.
Analysts said although the central bank’s rate hike campaign is likely to start dampening growth eventually, current rate levels are still too low to cool mortgage borrowing which has largely fuelled credit growth.
Central bank data on Wednesday showed credit expansion quickened from an unrevised 25,28% in September and surpassed consensus expectations of a 26,60% increase year-on-year.
During the same period the broadly defined M3 measure of money supply — often a pointer to rising inflation pressure — grew by 23,51%, also above expectations of a 22,80% increase.
Analysts said the data showed consumers were not heeding central bank warnings to cut spending and hardened arguments for more interest rate hikes.
”Evidently there has been little impact on consumer spending by the interest rate hikes we have had up to now,” said Monica Ambrosi, an analyst at ETM. ”No doubt the Reserve Bank will need to keep hiking at least two more times.”
The rand currency firmed slightly after the data was released while yields on the benchmark R157 bond due in 2015 fell 2,5 basis points to 7,965%.
Faster economic growth in South Africa has been driven largely by domestic demand, but spending has pushed household debt to record levels at almost 70% of disposable income, adding to inflationary pressures.
Hike seen next week
In response the central bank has hiked its key repo rate by 150 basis points since June, and another half percentage point rise to 9% after the bank’s policy committee meets next week is almost a certainty.
Standard Bank analyst Shireen Darmalingam said the hikes were starting to affect house prices and another increase in rates was likely to hinder growth in mortgage advances.
”This is likely to pressure private sector credit expansion in the coming months. Perhaps then consumers will heed [Reserve Bank] Governor [Tito] Mboweni’s advice to spend cautiously and wisely,” Darmalingam said.
Earlier this month Mboweni said the institution would remain resolute in keeping inflation under control, and not hesitate to change monetary policy before Christmas if necessary to keep the key figure within a targeted 3 to 6% range.
The Reserve Bank has said high consumer spending and a weaker rand currency were the main risks to the inflation outlook, and may lift CPIX inflation to 6% in 2007.
The rand has lost nearly 11% of its value against the US dollar since the start of the year, weakened in part by a yawning current account deficit of over 6% of gross domestic product. – Reuters