Producer inflation data gives a welcome boost to the rand

Published Jun 26, 2015

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Wiseman Khuzwayo

THE RAND touched its strongest level in a month against the dollar yesterday after producer inflation data added to recent signs that price pressures are rising, backing the case for higher interest rates. The rand hit a session high of R12.082 against the dollar, its strongest since May 28.

A break of R12.10 should see the rand try to head to the R11.95/98 support,” Warrick Butler, a currency trader with Standard Bank, said.

On Wednesday, Reserve Bank governor Lesetja Kganyago said the current pause in the monetary policy tightening cycle was likely to be temporary due to mounting inflationary pressures.

The bank has kept the benchmark repo lending rate on hold at 5.75 percent at its last five policy meetings.

Producer price index (PPI) inflation accelerated to 3.6 percent in May from 3 percent in April, Statistics SA said yesterday. This was against the market expectation of 3.3 percent.

On a month-on-month basis, prices at the factory gate increased by 0.8 percent after rising 0.9 percent in April.

Contribution

The increase was driven mainly by the food, beverages and tobacco products category, which rose 1.2 percent month on month and added 0.4 percentage points.

The coke, petroleum, chemical, rubber and plastic products category, which increased by 1.2 percent year on year, also made a notable contribution of 0.2 percentage points. PPI inflation rose mainly on the change in food, oil and petrol prices.

Azar Jammine, the chief economist at Econometrix, said that although the PPI inflation rate had edged upwards, it remained well below the consumer price index (CPI) inflation rate.

He said: “This indicates that underlying cost pressures within businesses are extremely subdued still and unlikely to spur an excessive increase in CPI inflation later in the year.”

Jammine said even though CPI would rise significantly in coming months due to the rebound in fuel prices, the high rate of increase in agricultural futures prices of food and the impact of sharply higher electricity tariffs, he remained confident that inflation would not breach the upper end of the 3 percent to 6 percent target before the end of the year.

Headline consumer inflation quickened to 4.6 percent year on year in May from 4.5 percent in April.

CPI would average 5.6 percent in 2015, according to a second quarter survey of financial analysts, business people and trade union representatives, Bureau for Economic Research said yesterday.

Annabel Bishop, the chief economist at Investec, said: “The Reserve Bank has raised its CPI inflation forecast for 2016 and has strongly signalled it will likely raise interest rates this year. We continue to expect a 25 basis points hike in July.”

Increase further

Dennis Dykes and Johannes Khosa, economists at Nedbank, said the monetary policy committee (MPC) of the Reserve Bank had already indicated that the expected rise in consumer inflation above the upper target range in 2016 made a hike increasingly likely.

The timing will depend on cost-push factors, such as expected future increases in electricity tariffs, the trajectories of the rand and oil prices, as well as the timing and extent of US interest rate normalisation.

Dykes and Khosa said annual producer inflation was expected to increase further in the coming months on the back of increasing food and fuel prices, which made up 45.8 percent of the PPI inflation basket.

The fall in PPI inflation this year has stemmed from lower inflation prices. However, expectations are for both petroleum and food prices to increase in the coming months. – Additional reporting by Reuters

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