Kevin O’Grady

Economics Editor

PRIVATE-sector demand for credit continued to grow apace in December, in a sign of the enduring strength of domestic demand.

The jump in private-sector credit extension was bigger than market expectations, and came despite warnings last year from Reserve Bank governor Tito Mboweni that consumers should start getting themselves out of debt while interest rates and inflation were low.

The Reserve Bank said yesterday that demand for credit grew an annual 19,7% in December, from 18,8% in November. Economists had expected growth to slow to about 18,6%.

Partly as a result of increased credit, M3 money supply also grew faster than expected.

The Bank said M3 — the broadest measure of money supply — grew an annual 18,14% in December, from 16,44% in November.

Economists said yesterday that the higher-than-expected numbers added to the belief that the Bank’s monetary policy committee (MPC) would not change interest rates at its two-day meeting starting today.

Although stronger domestic demand and rising money supply were potentially inflationary, it was expected that the strong rand would help keep inflation under control, obviating the need for a rate hike.

When Mboweni issued his warning last year, expectations were that the next move in interest rates would be upwards.

Since then, this has gradually shifted to hope for a rate cut, although this was damped by worse-than-expected consumer and producer inflation data released last week.

"If ever there were any doubts that the (Bank) would this week do anything other than keep interest rates on hold, the December monetary aggregate numbers are likely to dispel the doubts," said NKC economist Hugo Pienaar.

"After slowing in October and November, both overall credit and the so-called asset-backed credit, which includes only the interest rate-sensitive categories of credit demand, accelerated in December", Pienaar said.

"These trends are a further indication that consumer demand remains extremely healthy and in our view it would be an inflation risk to further stimulate the consumer with more rate cuts," he said.

The Reserve Bank’s figures show that mortgage advances, which constitute a large chunk of asset-backed credit, grew 27,6% year on year in December — the same as November and slightly off the October peak of 28,8%.

"The somewhat lower growth in mortgage advances since, is most probably the result of the still slowing residential property market, while talk of higher interest rates late last year could also have had an impact on the growth rate during the final stages of the year," Absa economist Jacques du Toit said.

Standard Bank economist Shireen Darmalingam said growth in overall demand for credit was likely to remain strong, "supported by low, and perhaps even declining interest rates".

"The risk, albeit relatively small, lies in the fact that at some point domestic demand may become inflationary. Nonetheless, given a target-friendly inflation outlook, the (Bank) is likely to keep interest rates constant at its MPC meeting this week," she said With Reuters.