A rapidly declining credit situation in South Africa is indicative of the soft economic conditions and consumers unwilling to push demand, but is it enough to entice the central bank to cut rates one more time? It appears opinion is divided on this point.

Economist from Nedbank, Carmen Altenkirch, told I-Net Bridge that one more cut in the current cycle could be expected after rates were kept on hold at seven percent last week.

"We expect inflation will be back in range early next year and the Monetary Policy Committee has shown sensitivity towards economic growth. If the recovery does falter, then we could be in for another 50 basis point cut," she said.

However, Absa Capital's economists said in a note after the release of the credit data that from a monetary policy perspective there is very little evidence of demand-driven inflationary pressures, where the main risks to the inflation outlook emanate from cost-push factors, such as rampant wage growth and accelerating administered price increases.

"This, along with tentative signs of an improvement in economic activity, leads us to believe that the policy rate will remain on hold at seven percent until Q3 (2010) when a gradual tightening cycle is likely to commence," they say.

Save rather than spend anew

Shireen Darmalingam, economist from Standard Bank, points out that following the rate cut in August and with expectations of no further rate cuts, consumers may feel inclined to save rather than start spending anew.

"Depleted household wealth effects, with deflationary house price values, are sure to contribute to tardy demand for credit. Households have been under increasing financial strain due to high interest rates and inflation prior to the recession, which has reduced the ability to save. As such, the continued decline in economic activity and lacklustre path to recovery will prolong the downward trend in PSCE," she says.

No doubt, the central bank has a tough balancing act to perform. Its next meeting takes place on Thursday 22 October. Could Tito Mboweni be enticed to provide a farewell gift in the form of a cut?

The market thinks this may indeed happen. A Johannesburg-based bond expert told I-Net Bridge that the credit data is showing that consumers are under strain and "we would expect a rate cut to ease the consumers' woes".

A rate cut to ease the consumers' woes

The benchmark R157 bond has gained over three basis points during the course of the morning, with the dealer pinpointing the firm rand and soft credit data as the reasons.

Credit extension to the private sector (PSCE) grew at a rate of 2.34 percent year-on-year (y/y) in August from a revised 3.31 percent (3.40 percent) in July, the South African Reserve Bank (SARB) said on Wednesday.

The rate of growth of South Africa's broad M3 money supply measure rose by 5.49 percent in the year to end-August from a revised 5.70 percent (5.78 percent) in the year to end-July.

The rate of growth in South African credit extension to the private sector (PSCE) was expected to have increased at 2.70 percent year-on-year (y/y) in August, according to a survey by I-Net Bridge.

South Africa's broad M3 money supply aggregate growth rate, meanwhile, was expected to have increased in July at 5.80 percent y/y.

Forecasts among the economists surveyed for PSCE ranged from 2.1 percent to 2.9 percent, while the range of forecasts for M3 was from 4.9 percent to 6.8 percent at the top of the range.

I-Net Bridge

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