Credit data support rate cut

Johannesburg - Demand for credit by South Africa's private sector rose by 1.98% year-on-year (y/y) in July, compared with a downwardly revised 0.89% expansion in June, central bank data showed on Tuesday.

Growth in the broadly defined M3 measure of money supply accelerated to 3.71% y/y compared with slightly downwardly revised growth of 2.40% previously.

A Reuters poll last week forecast private sector credit demand would increase by 1.45% y/y in July, while annual M3 was seen at 2.45%.

Jeffrey Schultz of Absa Capital says the growth is slightly stronger than expected, but essentially still largely showing that credit extension remains relatively weak in the economy.

"It is supporting our revised rate view; we're now looking for a further 50 basis points rate cut at next week's meeting.

"It's just below 2%, still relatively weak credit growth and I think that, together with last week's weaker-than- expected GDP (gross domestic product) figures and significantly lower-than-expected inflation figures, supports our view for a further rate cut."

Credit demand growth has been in positive territory since May, after eight months of contraction as consumers struggled with heavy debt and the impact of a recession.

The recent annual increases have however been minimal with the June print coming in below market expectation as bank lending remains cautious.

Household debt levels remain close to record highs and job insecurity is still of high concern, with about a million jobs being shed during last year's recession.

The Reserve Bank has kept interest rates on hold at its last two policy meetings, citing economic recovery, after cutting them by 550 basis points from December 2008 to March 2010, leaving the key repo at a three-decade low of 6.5%.