SA credit growth slows, giving bank room to cut rates

South African bonds overlooked a weaker rand to open firmer on Friday after credit extension and money supply data surprised to the downside. This adds more weight to calls for a 100 basis point cut in interest rates next week.

Early on Friday the short-term government R153 bond was at 6,820% from its previous close of 6,855%. The medium-term R157 was at 7,320% from a previous 7,350%, while the long-term R186 was at 7,750% from 7,775%.

The rand was last at 10,0647 to the dollar from a previous close of 10,0160.

Following a CPI reading of just 10,3% on Wednesday and a PPI reading of 11,0% on Thursday, further good news was in store on Friday with lower than expected credit and money supply data. This data is another key reading for the monetary authorities, who make their next rates decision on Thursday next week.

Credit extension to the private sector (PSCE) grew at a rate of 14,04% year-on-year in December from 15,30% in November, the South African Reserve Bank said on Friday.

The rate of growth of South Africa’s broad M3 money supply measure rose by 14,53% in the year to end-December from 16,26% in the year to end-November.

The rate of growth in credit extension was expected to have increased at 15,4% year-on-year, according to I-Net Bridge’s Econometer.

South Africa’s broad M3 money supply aggregate growth rate, meanwhile, was expected to have increased at 16% year-on-year.

“This is a good figure for the first time in a long time,” said Fanie Joubert, an economist from Efficient Group.

“The one item we have been worried about is other loans and advances—which includes credit cards and overdrafts—and this came down by R16-billion. It is a huge drop and is probably the biggest one on record—at least, according to my data since 1994. This data, together with the inflation numbers this week, leads us to feel that a 100 basis point cut in interest rates is justified next week.”

Jean Mercier, chief economist from Citigroup in South Africa, agreed: “These are great figures and are weaker than I expected. It seems there was weaker activity by the corporate sector and loans to households are continuing to slow. The central bank has room to cut interest rates from current levels.”

These expected cuts are good news for bond prices, which gain ground as yields drop to meet the changing supply and demand dynamics ushered in by lower lending rates.

Foreigners were net buyers of R677-million worth of South African bonds on Thursday after net purchases of R1,360-billion worth of local bonds on Wednesday, Bond Exchange of South Africa statistics show.

Nominal cumulative volume was R45,438-billion on Thursday from R59,026-billion on Wednesday.—I-Net Bridge

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