Consumers can start preparing themselves for the prime interest rate to fall by at least three percentage points to 12% before Christmas.
That’s the good news coming hard on the heels of data showing that producer price inflation (PPI) hit its lowest level in 30 years in May — down a whopping 1,3% month-on-month and rising only 1,1% year-on-year.
Both domestic and imported prices fell from the previous month, by 0,6% and 3,4% respectively. This fuelled expectations for PPI to hit the zero-level before the end of the year.
Even more importantly, slower producer price inflation is expected to feed through to lower consumer price inflation. This should ensure that CPIX (consumer price inflation less mortgages) falls towards 4% by year-end, according to John Stopford, portfolio manager at Investec Asset Management.
Stopford said much of the monthly decline in PPI was due to the effects of lower oil prices in rand, accounting for 1% of the 1,3% monthly decline. “The effect of the strong rand is clearly helping to bring down the cost of imported goods,” he added. In fact, imported manufactured goods prices fell by 1,6% month-on-month, with price declines across a very broad range of goods.
John Loos, an economist at Absa, said it “really strengthens the case for aggressive interest rate cuts for the rest of the year and into 2004”.
“We are still expecting a prime rate of 12,5% at year-end and a 1% rate cut in August and at each of the next Monetary Policy Committee meetings. But if the sharp PPI fall feeds through into a dramatic decline in CPIX, then we could see faster or more aggressive cuts.”
Stopford cautioned that next month would see a seasonal jump in electricity prices, which would slow the pace of decline in inflation. Nevertheless, the quote of the week belongs to Dawie Roodt, an economist at PLJ Financial Services: “I believe we have broken the back of inflation — it’s not a problem in South Africa any more.”
The rand continued its run triggered by the Reserve Bank’s 1,5% interest rate cut last week. The local currency firmed to R7,68 against the dollar just after the release of the PPI.
More good news arrived on Wednesday night in the form of yet another key United States rate cut by the Federal Reserve. The federal funds target rate was cut by quarter of a percentage point to a 45-year low of 1%.