February 1, 2005 BR

By Mariam Isa

Johannesburg - The growth in broadly defined money supply slowed in December, while credit demand was just below forecasts, data showed yesterday, fuelling speculation that the SA Reserve Bank might cut interest rates next week.

Figures issued by the central bank yesterday showed that the M3 measure of money supply grew 12.82 percent in the year to December, after rising a revised 14.23 percent in November.

Government bond prices rallied as the news reinforced the message sent by benign inflation figures last week, with the yield on the benchmark R153 bond initially rallying 7 basis points to 7.72 percent and testing a record best.

Adenaan Hardien, an economist at African Harvest fund managers, said: "The increase in money supply is largely technical and credit demand growth is still very strong. But after last week's [inflation] numbers it's still reasonable to assume the central bank might cut rates at its next meeting."

The main reason for the slowdown in annual M3 growth was a big fall in net claims on the government sector, which reflects money the government takes out of the system and which fell by R17.6 billion in December, the data showed.

Growth in annual demand for private sector credit was a bit more muted than expected, rising by an annual 13.64 percent, compared with a revised 10.41 percent in November and forecasts of a 13.8 percent increase.

But analysts pointed out that underlying credit growth remained very strong, with asset-backed credit growth rising an annual 16.3 percent from 15.6 percent in November. Mortgage advances were also robust, climbing 24.1 percent compared with 22.7 percent in November.

JP Morgan economist Marisa Fassler said in a research note: "The strength of domestic demand ... could prompt a degree of caution in [central bank] decision making.

"However, recent downside surprises on inflation, combined with a positive inflation outlook, means that arguments for and against a further 50 basis points rate cut are finely balanced at this stage. We continue to see rates on hold at next week's meeting."

The Reserve Bank will hold its next monetary policy meeting on February 9 and 10.

At the bank's last monetary policy meeting in December, governor Tito Mboweni highlighted a range of inflation concerns and warned that there were signs of capacity constraints in the economy, as the gap between potential and actual output narrowed.