GROWTH IN M3 SUPRESSED BY SHARP FALL IN GOVERNMENT CLAIMS
Y-o-y growth in broadly defined M3 money supply fell by considerably more than expected in September. September's growth of 16.7% was sharply down on August's 19.0%. Some decline had been expected for statistical reasons related to the fact that in September last year M3 had jumped by a huge 2.7% m-o-m which was unlikely to have been repeated in September this year. However, the decline recorded, which took growth in M3 to its lowest level in four months, was greater than anticipated. Closer analysis however reveals that this was largely attributable to a sharp R11.2bn decline in net claims on the government sector. This is a notoriously volatile and relatively unpredictable timeseries. In the absence of such a decline in government borrowing, growth in M3 would have been far more substantial, at 1.8% on a m-o-m basis, instead of the modest 0.7% actually recorded. Y-o-y growth in M3 would have declined from 19.0%, to no less than 18.0%, in line with expectations. Accordingly, it is doubtful whether the decline in M3 growth will be particularly favourably received in money and capital markets.

HUGE GROWTH AGAIN IN MORTGAGE ADVANCES
On the contrary, markets are likely to have been somewhat disturbed by signs of ongoing rapid growth in private sector credit extension. Although the increase in y-o-y private sector credit extension growth from 23.0% in August, to 23.1% in September, might seem marginal, one had expected a significant decline in this y-o-y measure for statistical reasons. This is related to the fact that in September 2004, private credit extension grew by a substantial 2.5% m-o-m and one would accordingly be comparing against a higher base figure for September 2004 in calculating the y-o-y growth rate for September 2005. In particular, analysts might be slightly spooked by the ongoing rapid growth in the largest component of credit demand, viz. mortgage advances. M-o-m growth of 2.6% was the highest growth recorded for this category of credit extension this year, taking y-o-y growth in mortgage advances to its highest level in 21 years, viz. 29.0%. In fact this is just short of the all-time record of 29.3% recorded in March 1984. To the extent that re-advances on existing home loans are being used extensively as a means of financing expenditure other than just on new homes, this phenomenal growth in mortgage advances suggests that the general consumer spending spree on borrowed money continues unabated to the present. In addition, leasing finance grew by a hefty 1.6% m-o-m in September, even if this was slightly down on the 2.0% increase recorded in August.

LAG BETWEEN MONEY SUPPLY GROWTH AND INFLATION MAY BE LONGER THAN BELIEVED
The ongoing growth in private credit extension reinforces the fears expressed by Reserve Bank Governor Tito Mboweni in recent weeks regarding possible second round price affects emanating from the steep increase in fuel prices over the course of the year. High growth in money supply tends to filter through the price system with a lag. It creates an environment in which substantial wage increases can be demanded by workers, in which businesses are able to pass on cost increases more easily and in which government agencies are able to increase the cost of their services at a rate in excess of inflation. Thus far, second round price increases do not appear to have emerged. One suspects that this situation may continue for a few more months to come. It is conceivable that the full effects of the high growth in money supply of the past year might only manifest themselves during the first half of next year. The peak inflation rate in this regard will only be manifested for statistical reasons once the February/March inflation data are published. It is conceivable that the positive message sent by relatively good inflation numbers over the next few months might contribute towards delaying any interest rate cut. Even so, by the time the April or June MPC meetings are upon us, the impact of higher money growth on inflation might be sufficiently apparent as to compel the Bank to tighten, possibly even fairly aggressively. What might also bring such a situation about is that excessive monetary growth ultimately means an excessive supply of currency. In other words, these trends of accelerated credit growth are bound to work their way through into weakening the Rand and in so doing forcing inflation and interest rates upwards, but possibly not before well into the first half of next year.