October 30, 2003

By Vernon Wessels

Johannesburg - The propensity of households and companies to borrow has been fuelled by a cut in the repo rate to 8.5 percent, which has brought the prime lending rate to 12 percent, its lowest level since August 1986, according to data released by the Reserve Bank yesterday.

Growth in private sector credit extension, which measures the amount of credit granted by banks, rose to an annual 18.8 percent in September from 16.8 percent in August and against expectations of 16.9 percent.

But money supply, which effectively measures the amount of money circulating in the economy and acts as a leading indicator of inflationary pressures, was better than expected.

M3, the broad measure of money supply, grew at an annual rate of 5.5 percent last month from 5.1 percent in August and against expectations of 5.8 percent.

Cees Bruggemans, the chief economist at First National Bank, was not concerned by the numbers as the drop in producer inflation meant "we are finally getting somewhere structurally" as a lower inflationary environment would result in faster economic growth. 

Lower interest rates would also bring forward a depreciation in the rand rather than having to wait for Europe or the US to hike rates.

This would also be positive for growth, he said.

Monica Ambrosi, an economist at Standard Bank, said there was "no need for the Reserve Bank to be overly cautious" in lowering interest rates as all factors were stacked in favour of subdued prices over the next six to 12 months.

The bank expected the prime rate to be lowered to 10 percent by February, although "a more bullish camp at Standard Bank also believes that a single-digit prime is not inconceivable", she said.