More aggressive interest rate cuts are in the offing after the latest plunge in year-on-year producer price inflation, economists predicted on Wednesday.
They said the tempo at which prices at producer level were tumbling implied there was considerable scope for consumer prices to fall significantly.
A prime interest rate of lower than 12,5% by February next year was not inconceivable.
Statistics SA (Stats SA) reported earlier in the day that the production price index (PPI) sank to 1,1% last month from 3,3% in April.
The experts said this brought PPI inflation to its lowest level since the 1960s. The CPI (consumer price index) was bound to follow the downward trend.
Standard Bank economist Monica Ambrosi expected another bold interest rate reduction by the monetary policy committee (MPC) of the Reserve Bank at its next meeting in August.
”It is now also more likely that the magnitude of the rate cut may be similar to the one in June,” she said.
The central bank triggered a 1,5% rate cut on June 12 by lowering its repo rate — at which it lends money to commercial banks — to 12%.
Senior Absa Group economist Christopher Hart said negative producer price inflation by the second half of the year was not impossible.
”The dramatic decline in the PPI… will help to provide the Reserve Bank with greater confidence to lower rates at a more aggressive pace at the remaining MPC meetings this year.”
Hart said the MPC might find itself battling to catch up with the inflation trend.
”It is highly possible that both PPI and CPI inflation rates will fall faster than interest rates over the next few months.
A prime rate of below 12,5% by February next year was, therefore, not inconceivable.
Ambrosi doubted the central bank would be concerned about over-fuelling domestic demand by cutting interest rates aggressively.
”In fact, if it procrastinates, it could prove detrimental for domestic growth,” she said.
Stats SA ascribed the latest PPI partly to a lower inflation rate in the price indices for products of petroleum and coal.
The rate for these products fell from 4,9% in April to minus 13,9% last month.
There was also a drop in the rates for furniture, food at manufacturing, and transport equipment.
Stats SA said these factors were slightly counteracted by a higher rate of increase for agricultural products.
Their rate rose from minus 4,5% in April to 0,5% percent last month.
The PPI for locally produced commodities declined from 5,1% in April to 3,4% last month — the lowest since June 1998 when it was 3,2%.
Stats SA also recorded a five-year low in the PPI for imported goods. It declined to minus 4,8% last month from minus 1,4% in April. – Sapa