SA December PPI slows, supports big rate cut

South Africa’s producer price inflation (PPI) slowed to an 11-month low of 11% year-on-year in December, lending further weight to the case for an aggressive interest-rate cut next week.

Figures from Statistics South Africa on Thursday showed annual PPI braked from 12,6% in November to its lowest level since January 2008, when the agency altered weightings and added new products to the price basket.

Producer inflation averaged 14,2% in 2008, Stats SA said.

Month-on-month PPI, representing domestic output, was -1,1% in December compared with -1.3% previously.

Imported commodities inflation slowed to 3,4% year-on-year in December compared with 6,3% the month before.

Economists polled by Reuters last week forecast that annual PPI would decelerate to 11,4% in December and decrease by 0,9% on a monthly basis.

The factory gate prices data comes a day after Stats SA reported a sharp slowdown in targeted CPIX consumer inflation to 10,3% year-on-year in December, and further increases the likelihood the central bank will next week cut interest rates by more than last month’s 50 basis point reduction.

The central bank lifted rates by five percentage points between June 2006 and June 2008 in a bid to rein in consumer spending and bring CPIX back down to within a 3% to 6% target range.

”I think PPI, as with consumer inflation yesterday [Wednesday], surprised on the downside. It’s further confirmation that we are going towards 6% as far as consumer inflation is concerned, and we might even be back in the target range by the middle of this year,” said Monale Ratsoma, macro strategist at Absa Capital.

”For the Reserve Bank I think the debate will be very much centred around whether to cut rates by 50 points or 100 points, and our sense is that the outcome next week will be 100.”

The central bank says consumer inflation is expected to return to within target range in the third quarter of 2009, although a weaker rand exchange rate poses a threat. — Reuters

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