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Mbeki says an interest rate hike is 'not the only option to controlling consumer spending'

By unknown | Feb 13, 2007 | COMMENTS [ 0 ]

Zweli Mokgata

Zweli Mokgata

Raising interest rates is not the only option to controlling climbing consumer spending, said President Thabo Mbeki, but analysts say a policy change would be too drastic for South Africa's otherwise stable environment.

Mbeki said on Sunday, ahead of the South African Reserve Bank's Monetary Policy Committee (MPC) meeting this week, that it was not "necessary to always use what is a blunt instrument [interest rates]" and that the matter should be approached in a more targeted way.

"If you, for instance, impacted on capital adequacy in the banks in order to impact on credit extension, that might be a better way of coming at it rather than just responding glo-bally with higher interest rates," Mbeki said.

Capital adequacy is the amount of money in various forms that a bank is mandated to keep in store by the reserve bank. An increase in that amount would mean that banks will need to limit the amount of credit that they give out to customers.

Stanlib economist Kevin Lings said that though Mbeki's comments might affect the MPC outcome, the bank should be cautious about adjusting capital adequacy policy because this would cause "extreme difficulty" for the banking industry.

"It's not a new suggestion, but if the president says it, the MPC might take a closer look at it," Lings said.

"It's not a policy that should be used frequently, especially with the effect that it would have on the country's economy. We've created about 1,5 million jobs in the country over the past three years, you don't want to suddenly put a stop to that."

Futuregrowth Asset Management director Andrew Canter said it was natural for credit to grow in a developing country.

"It's a structural issue. The deepening of consumer credit is a positive step in the evolution of South Africa's economy."

Consumer spending, fuelled by record credit growth of more than 25 percent year-on-year, remains a concern for the bank, despite inflation coming in lower than expected over the past few months.

Canter said that the most likely action would be no action at all, because the current policy was working well.

"The slow down in car sales and house prices indicates that the economy is stabilising, and that current policy is having an effect. The reserve bank will most probably leave it the way it is." - With I-Net Bridge


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