Interest rates likely to be held as credit growth dips
CREDIT extended to the private sector, including households and private companies, moderated further in May compared with May 2015 — a strong indication that spending remains subdued. Nedbank economist Busisiwe Radebe agreed that the Reserve Bank would probably pause its interest-rate hiking cycle in July, given that domestic growth had disappointed.
CREDIT extended to the private sector, including households and private companies, moderated further in May compared with May 2015 — a strong indication that spending in the economy remains subdued.
The Reserve Bank’s credit extension data on Thursday came as Statistics SA data showed that producer inflation decelerated more than expected in May from a year earlier.
Slower growth in credit extension, lower-than-expected inflation, the recent rally in the rand and tepid economic growth support unchanged interest rates in July.
Growth in credit extension slowed to 6.6% year on year in May from 7.1% in April while producer inflation decelerated from 7% year on year in April to 6.5% in May — the slowest pace of increase since December 2015.
“We suspect that the inflation peak is in sight. The rand has stabilised and the economy is weak so we do not see the Reserve Bank hiking interest rates any more this year,” Old Mutual Investment Group senior economist Johann Els said.
Nedbank economist Busisiwe Radebe agreed that the Reserve Bank would probably pause its interest-rate hiking cycle in July, given that both producer and consumer price increases had come in better than expected in recent months and that domestic growth had disappointed.
Speaking at the ICBC Standard Bank Africa Investor Conference in London on Thursday, deputy Reserve Bank governor Francois Groepe said that inflation expectations and how they developed in coming months would play a key role in the Bank’s interest-rate decisions.
The central bank’s monetary policy committee will announce the rates decision on July 21.
Uncertainty over the evolution of inflation expectations required vigilance by the Bank, Groepe said.
“Vigilance will be needed in the coming quarters, as the secondary effects of earlier shocks, in particular on the exchange rate, are still being felt — and there is no guarantee that inflation expectations will remain stable,” he said.
Inflation expectations, as measured by the Bureau for Economic Research, remain just outside the 3%6% target band at 6.2%.
“The upward bias in (inflation) expectations limits the margin of manoeuvre of the … South African Reserve Bank in so far as any sizable shock to prices can easily create a situation where inflation settles above the target range for an extended period of time,” Groepe said.
Although producer prices grew at a slower pace in May, Radebe said they would probably accelerate in the months ahead but not as much as was earlier forecast given the slightly better-than-expected rand outlook.
Groepe expressed confidence that, provided “the right policies” continued to be put in place, SA could avoid a downgrade to sub-investment grade, or junk status.
Economic growth was showing signs of bottoming out, he said, and a firm commitment to fiscal consolidation and the implementation of plans to stabilise public debt supported sovereign credit ratings.
An important element in securing the stability of inflation expectations would be the ability of SA to maintain its investment-grade rating, the deputy governor said.
Adverse developments, such as a credit rating downgrade to sub-investment grade, would “probably further complicate” the challenges of weak growth and rising inflation that the Bank was having to deal with.
The Bank expected the economy to grow 0.6% in 2016 – the slowest pace of expansion since the recession.