South African Credit, Producer Prices Reduce Chance of Rate Cut

South African credit growth and producer-price inflation accelerated in August, reducing expectations the central bank will cut its key interest rate even as the economic outlook deteriorates.

Expansion in lending to households and businesses increased to 6.1 percent from 5.7 percent in July, the Pretoria-based central bank said on its website today. The median estimate in a Bloomberg survey of 12 economists was 5.5 percent. Statistics South Africa said producer-price inflation climbed to 9.6 percent from a year earlier, the fastest pace in almost three years and beating a 9.1 percent forecast of 13 economists.

“This will set the expectation of a cut back a little bit,” Kevin Lings, an economist at Stanlib Asset Management in Johannesburg, said in a telephone interview. With rising inflation driven by costs rather than demand, “you would typically want to keep the rate on hold,” he said.

Governor Gill Marcus left the repurchase rate at 5.5 percent last week and said the Monetary Policy Committee was “ready to act” if slow growth in the U.S. and a European debt crisis threatens to derail growth in the Africa’s largest economy. Economists lowered their growth forecasts after a contraction in manufacturing and mining output slowed annualized economic growth to a two-year low of 1.3 percent in the second quarter.

Citigroup Inc. estimated the economy will grow 3 percent this year, less than its previous forecast of 3.4 percent, Jean-Francois Mercier, an economist at the bank in Johannesburg, said by phone. Stanlib reduced its prediction for this year’s economic growth to 3.2 percent from 3.6 percent, Lings said.

Go For Growth

With consumer price inflation only expected to temporarily breach the central bank’s 3 percent to 6 percent target range and a worsening economic outlook, the central bank will aim to spur growth rather than curb inflation when deciding on monetary policy, Lings said.

“Right now you would think that our of the inflation-growth choice, they will go with growth, believing that inflation is temporary,” he said.

The inflation rate was unchanged at 5.3 percent in August, according to the statistics office. The central bank forecasts it will probably breach the upper end of the band in the fourth quarter and peak at about 6.2 percent.

The rand weakened 1 percent to 7.8839 per U.S. dollar at 2:20 p.m., pushing the decline this year to 16 percent. The currency is the worst performing among the 16 major currencies tracked by Bloomberg this year.

The broad M3 measure of money supply rose 6.2 percent in August from a year earlier, the central bank said. The median estimate in a Bloomberg survey was for M3 to expand 5.6 percent.

“If you look at the underlying trend, it’s one of things getting better,” said Razia Khan, head of Africa economic research at Standard Chartered Plc in London, before the data was released. “The big question mark everyone has right now is what is happening to consumer demand.”

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