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SA factory gate prices steady

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

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

Economists polled by Reuters expected producer price index (PPI) to slow to 6.3% y/yr and 0.2% on a monthly basis.  

Said Anisha Arora, emerging markets analyst at 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 (consumer price index) deceleration to 5.7% year-on-year will allow the South African Reserve Bank to concentrate further on the risks to GDP (gross domestic product) growth from the external eurozone 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% by 2013.”

Said Kadd Capital economist Elize Kruger: “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.”

Said Annabel Bishop, economist at Investec: “PPI inflation came out significantly higher than the market expectation of 6.3% 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 remains highly concerned about the vulnerability of South Africa’s GDP growth to global events and the market has factored in a 70% 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.”

The yield on the 2015 bond firmed to 5.99% at 09:45 GMT from 6.03% before the data was released at 09:30 GMT, while the rand was little changed at R8.4250 against the dollar.

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% y/y in May, undershooting market expectations and coming into the Reserve Bank’s 3%- 6% target sooner than expected.

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

 
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