Household Credit Demand Drops

December 2 - The Central Bank may be on its way to cutting interest rates in South Africa once more after it was announced that October saw the first fall in demand for credit since 1966.

Demand by households and businesses dropped by 0.42% in a year on year comparison.

A growth in demand by 1.49% had been recorded in September.

While there are signs that South Africa is recovering from its first recession in 20 years, analysts believe that the process will be very slow as households and companies struggle to find finance.

"Essentially it is still a reflection of what's going on on the corporate side," said a macro strategist for Absa Capital, Ian Marsberg. "It's also still a reflection of the weak state of domestic economic activity."

Marsberg believes that interest rates will remain at the current level until the fourth quarter of 2010. "So it's essentially a story of interest rates remaining at low levels for an extensive period of time," he explained.

Market analysts believe that the time is ripe for another credit rate cut. An economist with Citadel, Salomi Odendaal said: "We still think there is the possibility of another interest rate cut if activity is fairly slow during the festive season and with inflation in the target range."

Interest rates were cut by 5 percentage points between December of last year and August 2009 in a bid to stimulate the economy, however the Reserve Bank opted to leave the rates unchanged at 7% at the last three meetings of the deciding committee

Demand related sectors of the South African economy continued to fall because of less consumer demand.

"I see no other route but to cut rates," said another market expert from Brait. "It's going to be very difficult to motivate not cutting rates when inflation is inside the target band."

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12/2/2009 10:10:17 AM