Absa rules out interest rate hike in 2006

Absa, South Africa’s largest commercial bank, is ruling out an interest rate hike over the next year, provided there are “no exogenous shocks given the economy.”

The bank’s view is expressed in its December 30 comment on November’s broad measure for money supply (M3), which rose marginally from a revised 15,9% year-on-year to 16,4%. Market consensus, as surveyed by Bloomberg, was 17,5%.

However, growth in credit extended to the domestic private sector (PSCE) in November fell further to 18,8% compared with October’s 19,3%. The market expected growth of 18,2% in November.

Annual growth in private sector credit extension has now fallen for the fourth consecutive month after peaking at 24,2% y/y in July. While part of the drop-off in demand for credit was probably related to the lower purchasing power as a result of the high fuel prices during the third quarter, the current high household debt level also appears to have an
impact on credit demand.

Absa, in its comments on the figures, believes the South African Reserve Bank (SARB) will welcome the slowing momentum in private credit extension data. Although, it warns that December’s readings could show some upward movement again, but this it expects, to be seasonal only.

“We rule out an interest rate hike over the next year, provided there is no exogenous shock. We further expect that although there could be room for an interest rate reduction
during 2006, the SARB will remain cautious given high debt levels and the widening current account deficit.”
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