Kevin O'Grady

Economics Editor

DEMAND for credit surged to a 13-month high in January as consumer spending continued unabated, all but ruling out a cut in interest rates next month.

Even avid advocates of a rate cut conceded yesterday that private sector credit extension and money supply figures released by the Reserve Bank undermined the case for a rate cut, to be decided on at the next meeting of the Bank’s monetary policy committee (MPC) next month.

Private sector credit soared 15,22% from a year earlier, after a revised 13,45% gain in December.

Although this was considerably below market expectations of growth higher than 16%, mainly because of volatility in the "investments and bills discounted" category, excluding this category, asset-backed credit grew 17%, compared with December’s growth of 16,12%.

The consumer categories — instalment sales and mortgage and leasing finance — grew a combined 23,6% year on year, from 22,8% in December.

M3 growth slowed to 11,98% in January, from 12,79% in December, mainly because of an increase in government deposits.

The Bank specifically flagged M3 and strong demand for bank credit as risks to inflation when it kept rates on hold last month. As a result, it is likely to view the latest data with concern at its next meeting in six weeks’ time.

Economists said yesterday that this week’s 42c/l petrol-price hike, the continuing trade deficit and the growing demand for credit may prompt the Bank to be even more cautious.

Hugo Pienaar of NKC Independent Economists said the surge in asset-backed credit and high oil prices were "why we believe the Bank will not cut interest rates again in April".

Investec economist Annabel Bishop said the drop-off in CPIX (consumer inflation excluding mortgage payments) would push up real interest rates, leaving room for a rate cut. However, yesterday’s robust credit figures raised the odds on the Bank leaving rates unchanged.

Brait economist Colen Garrow said the lowest interest rates in 24 years, R72bn in income tax relief since 1995 and an increase in the number of people claiming social and welfare benefits had all contributed to the strong growth in demand for credit.

The data "suggest the Bank may respond cautiously … preferring possibly to maintain the status quo on interest rates".

London-based Lehman Brothers economist Tolga Ediz said the latest data releases were all unsupportive of a rate cut. January’s trade deficit rose to R3,36bn; credit data showed robust but not alarming consumer demand; and the February manufacturing purchasing managers index (PMI) rose to a stronger-than-expected 54,2 from 49,3 in January.

"After this week’s data flow and with oil prices also rising, we are now changing our call that the MPC will cut rates," said Ediz.