September PPI drops 3,7%

South Africa’s factory gate inflation fell for the fifth consecutive month in September, dropping by a more-than-expected 3,7% year-on-year, rekindling hopes of an interest rate cut after soft consumer inflation and credit growth.

Statistics South Africa said on Thursday PPI, representing domestic output, dipped again after August’s 4,0% decline and fell 3,2% month-on-month.

Economists polled by Reuters last week forecast that annual PPI would fall by 2,7% and by 1,8% on a monthly basis.

The data may help reopen debate on whether the central bank has room to cut the repo rate again this year, after leaving it steady at the last two policy meetings, citing balanced inflation risks.

With softer-than-expected consumer inflation released on Wednesday and a new 43-year low growth for private sector credit demand, this week’s numbers show price pressures cooling and households under severe strain.

“Obviously the effect of the strong rand will come through in many of the prices and then the weak demand that we see will be one of the main driving forces that will keep PPI and also CPI lower than what people expect,” Citadel economist Salomi Odendaal said.

“We still think that there is a possibility that interest rates may be cut further, maybe in December ... it’s not out of the question with inflation numbers on the low side, and with these numbers we think there is still room for another interest rates cut.”

However, others suggested inflation may be reaching its low point and with expected big increases in power prices, the central bank may want to hold off on any more cuts after cutting the repo rate by 5 percentage points to 7% already this year.

Government bonds extended gains on the PPI numbers, after receiving a boost earlier in the session from the soft credit growth data.

The yield on the 2015 bond was down eight basis points for the day at 8,55%.

Statistics SA said imported commodities inflation fell 16,2% year-on-year compared with a 17,8% decline the month before, while exported commodities inflation dropped 11,2% year-on-year from -9,2% previously.—Reuters

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