Mariam Isa
28 September 2007
Johannesburg — PRODUCER inflation subsided to an annual rate of 9,4% last month, the lowest increase since December, and extending a slowdown that may encourage the Reserve Bank to hold interest rates steady next month.
Consensus forecasts had predicted a slowing to 9,7% from 10,3% in July, after scaling a peak of 11,3% in May.
Efficient Research economist Nico Kelder said: "This is significant. The Bank could use the slowdown as a reason for a pause in the interest rate hike cycle next month."
Markets are still betting the Bank will raise its key repo rate half a percentage point to 10,5% at its policy meeting next month, to quash inflation fanned mainly by rising food and fuel prices.
Government bonds leapt on yesterday's producer price data, with yields on the R153 bond due in 2010 diving 17 basis points to 8,98% on speculation that interest rates may not rise further after all.
Lending rates have climbed three percentage points since June last year, and are making inroads into consumer demand, the economy's main growth engine. But the benchmark CPIX (consumer inflation excluding mortgage costs) has breached its 3%-6% target range for five months in a row. Analysts predict it will peak near 7% next year, which would make it difficult for the Bank to retain credibility without raising rates again.
Food prices were again the main culprit behind the annual increase in the producer price index (PPI), rising a staggering 23,8% last month. They also drove most of the 0,7% monthly rise in PPI, which nonetheless slowed from July's 1,6%.
Citigroup economist JeanFrancois Mercier said: "Today's report strengthens our expectation that the peak in PPI inflation is behind us. It reinforces our expectation that the Bank will leave interest rates unchanged at its October policy meeting.
"But this remains a close call, given the likelihood of higher CPIX inflation in the near term."
Producer prices take up to three months to feed into consumer inflation, which subsided last month with CPIX moderating to 6,3% from 6,5% in July - a four-year peak.
Food costs account for more than a quarter of the CPIX basket of goods. With prices for grain and many other food staples still soaring, the inflation rate, watched for monetary policy, is unlikely to fall below 6% before the second half of next year.
Oil prices remain a threat, notching up a $10-a -barrel increase to record levels since the Bank's previous policy meeting last month. But much of that risk will be offset by gains in the rand, which has rallied 9,6% against the dollar since the middle of last month, scaling a two- month peak at R6,84 to the greenback yesterday.
Currency strength is negative for SA's exports but helps contain price pressures fanned by imports, particularly for fuel, which now accounts for about a fifth of SA's imported goods bill.
A brief bout of rand weakness sparked by global market jitters last month helped push the annual rise in the import component of PPI up to 9,7% from 9,2% in July, the data from Statistics SA showed. The annual increase in the locally produced measure fell sharply to 9,3% from 10,6% in July.
Analysts say the Bank is likely to consider growing evidence that higher lending rates are curbing consumer demand.
"We believe that the Reserve Bank's monetary policy committee will keep rates unchanged through the rest of this year as the full impact of previous interest rate increases on the economy is assessed," Nedbank said. "However, the risks are still on the upside."
Retail sales growth fell to a two-year low of 4,9% in July, compared with a revised 7,1% in June. Con-sumer spending slowed to 5,5% annualised in the second quarter from 7,5% in the first quarter.
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