Ayanda Shezi

Economics Correspondent

LOW inflation and low interest rates fuelled demand for credit to near 15-year highs, strengthening the case against a rate cut when the Reserve Bank’s monetary policy committee meets next month.

Economists said yesterday that from an inflation point of view, the figures, taken together with high oil prices and a weaker rand, should be worrying for the Bank.

Interest rates, at 24-year lows, have spurred consumer spending to record levels, as it has become more affordable to borrow money to finance purchases.

Producer price inflation (PPI) also came in above market expectations, largely on the back of higher international oil prices.

Economists said yesterday the strong growth in monetary aggregates, as shown by figures released by the Bank yesterday, counted against further monetary stimulus.

Private sector credit extension and money supply increased slightly above market expectations.

Private sector credit extension jumped 22,87%, to just more than R1-trillion in May, compared with an increase of 20,35% in April, spurred mainly by mortgage advances and leasing finance.

"The figures speak for themselves, consumers are continuing to spend," NKC economist Noelani King Conradie said yesterday.

She said the figures would make it hard for the Bank to further cut interest rates.

The broadest measure of money supply, M3, rose to 16,27% year on year in May, or R983bn, from a revised increase of 14,99% in April, driven mainly by claims on the private sector.

Standard Bank economist Shireen Darmalingam said the revision was also due to the reclassification of the Public Investment Corporation (PIC).

The PIC, which was previously not classified as part of the monetary banking sector, will now have its deposit liabilities, which contribute about 40% to total government deposits, included in the M3.

The higher-than-expected rise in PPI counteracted some of the positive consumer inflation news, Efficient Group economist Nico Kelder said.

PPI, which tends to lead consumer inflation by a few months, rose sharply to 2,4% year on year in May, against a 1,8% rise in April.

Prices rose 0,5% in the month.

"The increase in PPI indicates that producers cannot absorb all of the price increases resulting from higher transport costs," said Kelder.