Growth in demand for credit slows 1.75%

Friday, February 27, 2009

Pretoria - The significant 1.75 percent drop in the amount of credit commercial banks extend to the private sector is indicative of South Africans spending less and trying to save more in the current economic climate.

Chief economist at Nedbank, Dennis Dykes told BuaNews the Reserve Bank's announcement of a slowdown in the extension of credit to the private sector on Friday continued to reflect a picture of a strong slowdown in the South African economy.

"This means commercial banks are lending less to consumers as less people are buying cars and the demand for credit has dropped," Mr Dykes said, Friday.

The Reserve Bank in its release of credit data reported claims on domestic private sector down 1.75 percent from 13.6 percent in December 2008 to 11.85 percent for last month.

Dismal economic growth figures, along with higher than expected inflation figures and a drop in credit demand from commercial banks could lean heavily on the Reserve Bank's Monetary Policy Committee (MPC) to convene an emergency meeting to cut interest rates and try boost the economy.

Mr Dykes said the MPC was likely to wait for next week's release of vehicle sales data and manufacturing and retail sales statistics before considering an interim meeting.

"Whether or not the MPC will call an interim meeting really depends on the severity of those figures coming out next week," Mr Dykes explained.

The MPC is more likely to call an interim meeting at which the repo rate is cut by 100 basis points, than cut the repo rate by 200 basis points or a full 2 percent at the next scheduled meeting in April.

Addressing bankers on Thursday, the Reserve Bank Governor Tito Mboweni highlighted that no MPC meeting has as yet been called. "There is no meeting of the MPC that has been called, but the MPC can meet anytime."

He added that the public would be well-informed if the committee would meet earlier.

"The MPC does not take decisions based on a single number [such as January's inflation figure], and does not take decisions based on historical data as our task is to look forward, and monetary policy does not work backwards but forwards," Mr Mboweni explained.

With regard to inflation outlook and the possible fuel price increases in March and April, Mr Dykes said the volatile Rand to the Dollar exchange rate remained a threat to inflation outlook.

He said there had been some under recovery on petrol figures and therefore he expected a 40 cents increase in the petrol price. The Central Energy Fund will announce the figure later today.

Diesel on the other hand had an over recovery and will be coming down about 30 cents, Mr Dykes told BuaNews.

The increases in the Road Accident Fund (RAF) tax and government fuel levies, as announced by Finance Minister Trevor Manuel in his February 2009 Budget Speech, will come into play in April this year.

Mr Dykes explained: "We can expect an additional increase of about 40 cents with the taxes and levies going up. The money raised by the increase in the levies will go towards funding provincial expenditure."

Other Reserve Bank data shows the average gold fixing price has fluctuated between $759.36 and $858.21 per fine ounce from November 2008 to January 2009, respectively.

The Reserve Bank reported that the Rand/Dollar exchange has deteriorated significantly from R8.04 in September 2008, to R9.89 to the Dollar in January 2009.

The latest fuel prices for March 2009 are expected to be released at midday on Friday.

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