From Business Day
by Thabang Mokopanele
The March money supply and private credit extension figures released last week indicated that credit continues to be accumulated at a brisk pace in the economy, raising concerns about the resurgence in the demand for credit at a time when interest rates are on an upward trend.
The rise in money supply (M3), which points to inflation pressures, rose to 21 % in March from a marginal 20,9% in February, with the market expecting 20,7%.
Private sector credit extension accelerated to 22,6% year on year from 20,8% while the market projected 20,5%.
Analysts have warned that the pick-up in credit extension, coupled with the higher than expected inflation figures released for March, does not bode well for the outlook on interest rates.
"The pick-up in credit extension couldn't have come at a worse time as the
deteriorating inflation outlook is already placing pressure on the Reserve Bank to tighten monetary policy further. The type of credit being extended is especially worrying as the bulk of this is not emanating from asset-backed items but rather from the consumption-type credit items," Efficient Group economist Fanie Joubert said.
Reserve Bank Governor Tito Mboweni said last week there could be an emergency meeting of the monetary policy committee before June because of the worsening inflation outlook.
"The situation is deteriorating, and we can't just say that because the date is
fixed we must wait for that date," Mboweni said.
Consumer demand, which is the mainstay of the economy, has slowed sharply in response to interest rate hikes since June 2006. Lending rates have climbed 4,5 percentage points since then, taking the prime interest rate set by commercial banks to 15% - a near five-year peak.
"At this stage it seems clear that the consumer is in for a hard time and should be very cautious when considering taking on more credit aimed at short-term spending requirements, which ultimately needs to be repaid over a longer term.
"Advice will be to construct a detailed monthly household budget and plan ahead to ensure those more unfavourable developments such as further fuel price and interest rate hikes do not catch one off guard," Joubert said.
Money supply has been rising at breakneck speed in the economy, with the Reserve Bank's March Quarterly Bulletin indicating that the overall increase in M3 last year amounted to R319 bn, compared to R248,2bn in 2006.
The household sector increased its M3 holdings 16,1% last year, while the corporate sector's rise was 26,7%, according to the Bulletin.
Mortgage advances remain the largest credit category and R10,5bn was added to this item during March.
Other loans and advances items, including overdrafts and credit cards, are becoming an ever greater problem, as they recorded a leap to 29,5% from 23,9% in February.