/ 29 May 2008

PPI jumps, points to possible big rate rise

South Africa’s producer price inflation (PPI) accelerated unexpectedly to 12,4% year-on-year in April, increasing the possibility of a bigger than previously expected interest-rate hike in June.

Statistics South Africa said on Thursday headline PPI — which represents domestic output — accelerated from an upwardly revised 11,9% in March, while on a monthly basis it stood 2,1% from to 2% in March.

The PPI number came a day after CPIX (consumer inflation less mortgage costs) inflation beat forecasts to accelerate to a near five-and-a-half-year high of 10,4% year-on-year in April.

South African Reserve Bank (SARB) Governor Tito Mboweni said late on Wednesday drastic measures were needed to deal with high inflation and hinted at a possible 200-basis-point interest-rate rise.

The central bank has raised the repo rate nine times since June 2006 — all by 50 basis points — to 11,5% and will meet again on June 11 and 12.

Analysts said the PPI data increased the possibility of a bigger rate rise.

”A 100-basis-point rate hike now looks likely,” said Jeff Gable, head of research at Absa Capital.

Statistics South Africa said imported commodities inflation jumped to 21,2% compared with an upwardly revised 16,2% previously due to higher crude oil prices, while exported commodities inflation slowed to 6% year on year.

”Following last night’s [Wednesday] comments by SARB Governor Tito Mboweni hinting at the possibility of a 200-basis-point rate move, the market had been bracing itself for a bad PPI release, and they were not disappointed,” said Razia Khan, head of research for Africa at Standard Chartered.

”The SARB is right to be concerned. However, we still doubt whether we will see as much as a 200-basis-point rate move all in one go.”

Economists polled by Reuters last week forecast that annual PPI would come in at 11,8%, while the monthly rate of increase was seen at 1,5%.

‘Reckless and irresponsible’

The Congress of South African Trade Unions (Cosatu) said on Thursday that another interest-rate hike would worsen the conditions that led to the recent xenophobic attacks in South Africa.

It was reacting to the warning by Mboweni that the monetary policy committee might raise interest rates by two percentage points when it meets in June.

”The disgraceful outbreak of xenophobic attacks on foreigners by a minority of poor and desperate people are a tragic symptom of the unacceptable levels of unemployment and poverty,” the union federation said in a statement.

”Yet Tito Mboweni seems oblivious to the fact that his interest-rate hikes have been a major cause of these problems.

”And it will get even worse if he continues with this reckless and irresponsible policy.”

Cosatu said millions of South Africans were already suffering from the nine rate increases since June 2006.

Mboweni’s statement that ”pain is coming” was a huge understatement.

”We are already suffering intense pain. A one-off two percent increase now will be torture, and a death blow to many,” Cosatu said. — Reuters, Sapa