February PPI 'a shock to the system'

South Africa’s producer price inflation (PPI) accelerated above forecasts to 11,2% year-on-year in February from 10,4% in January, official data showed on Thursday.

Statistics South Africa said the headline number, representing domestic output, stood at 1,3% on a monthly basis, compared with 1% previously.

Economists polled by Reuters last week forecast that annual PPI would come in at 10,7%, while the monthly rate of increase was seen at 0,8%.

Fanie Joubert, economist from Efficient Group, said: “This number is obviously higher than our expectations, which is quite negative considering that CPI came in par with market expectations yesterday [Wednesday].

“This just gives more fuel to the Reserve Bank to hike rates when they meet again on April 9 and 10.”

Mike Schussler, economist at T-Sec, said: “Wow. If anybody doubted the fact that we were heading for an interest rate hike, these doubts are being eroded very quickly.
It is a shock to the system and we can expect to keep getting these kinds of shocks for now.

“If we look at the 14% Eskom price hike, never mind the proposed 53% revision, we are looking at a very high PPI of over 15% going forward.”

Danelee van Dyk, economist at Standard Bank, said the figure was in line with expectations, if adjusted for the new methodology that includes the mining and quarrying index.

“I wouldn’t over-analyse it yet, it would need a year or so to adjust to the new methodology. The risk for interest rates hike in April is still there given the general outlook of inflation, but we still think hiking interest rates would not be a good move due to growth concerns.”

Annabel Bishop, economist at Investec, said the figure adds to the pressure for an April interest rate hike.

“The key driver of February’s month/month increase was higher oil prices once again. Governor Mboweni’s hawkish comments yesterday have significantly increased the chance of an April interest rate hike and we have changed our official interest rate view as a result, to one of a 50bp tightening in April.”

Razia Khan, economist at Standard Chartered Bank, said the figure was “deeply uncomfortable”.

“What is interesting to note is the speed with which a weaker ZAR and heightened oil price pressures have affected imported PPI, with imported PPI surging to 15,9% y/y.

“Sure—a lot of this is beyond the control of the SARB [South African Reserve Bank], but with pipeline pressures this strong, they will not be able to take any risks with the inflation outlook at all.

“It now appears that CPIX will remain above 8% through to the end of this year, only returning to target by around May 2009, perhaps later. The argument that this was a temporary blip in inflation, (therefore not requiring a policy response) no longer holds.

“The SARB will be under pressure to react to evidence of the second-round impact of price pressures that has taken root, in order to prevent this becoming even more entrenched.

“In the face of all of this, it will be difficult not to tighten interest rates in April. The credibility of inflation targeting is at stake, and the SARB will have to act. ‒ I-Net Bridge, Reuters

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