Johannesburg - South African producer inflation, which represents domestic output, was unchanged at 6.6 percent year-on-year in May compared to April, Statistics South Africa said on Thursday.

However, on a month-on-month basis inflation quickened to 0.5 percent after prices rose 0.3 percent in April.

ANALYST COMMENTS

ELIZE KRUGER, ECONOMIST, KADD CAPITAL

“It could be the effect of the rand depreciation starting to come through, given that the rand has slid quite a bit.

“I won't be too concerned about the PPI outcome in terms of fuelling consumer price inflation as we have not seen a direct relationship between total PPI and CPI.”

ANNABEL BISHOP, GROUP ECONOMIST, INVESTEC

“PPI inflation came out significantly higher than the market expectation of 6.3 percent year-on-year.

“On the month, higher price pressures came from mining and quarrying, products of petroleum and coal, chemical and chemical products, electricity and paper and paper product prices.

“However, the South African Reserve Bank (SARB) remains highly concerned about the vulnerability of South Africa's GDP growth to global events and the market has factored in a 70 percent chance of a 50 basis point hike in September.

“Should market sentiment improve by moving to a risk-on environment - potentially on a successful EU summit - then the market probability of a rate cut will likely wane. We continue to expect no interest rate cut this year, but much will depend on the summit outcome, and hence euro country borrowing costs.”

ANISHA ARORA, EMERGING MARKETS ANALYST, 4CAST

“The rand weakened substantially in May, which has contributed to the month-on-month increase. However, the recent continued deceleration in the headline rate is clearly supported by the fall in commodity prices, particularly crude oil prices.

“Thus, we expect renewed downside momentum in the months ahead.

“The generally soft inflation print, following the May CPI deceleration to 5.7 percent year-on-year will allow the SARB to concentrate further on the risks to GDP growth from the external euro zone crisis and global events.

“Combined, these factors further support the case that the Monetary Policy Committee could cut rates this year and we look for rates at 5.0 percent by 2013.”

MARKET REACTION

The yield on the 2015 bond dropped to 6.005 percent at 12:02 SA time from 6.03 percent before the data was released at 11:30 SA time while the rand weakened to 8.4519/dollar from 8.4261.

BACKGROUND

- Statistics South Africa plans sweeping changes to PPI that will make it a more relevant indicator for consumer prices from 2013. For now, the index is dominated by commodities and tends to move in tandem with those prices, with little pass-through to consumer inflation.

- Headline consumer inflation eased to 5.7 percent year-on-year in May, undershooting market expectations and coming into the Reserve Bank's 3-6 percent target sooner than expected.

- The central bank has left its repo rate steady at 5.5 percent for the past 19 months but the market has started to price chances of monetary easing as domestic demand eases and inflation declines. - Reuters