March PPI quickens, rates outlook unchanged

South Africa’s factory gate inflation accelerated for the eighth straight month in the year to March, slightly below expectations but showing factory gate price pressures are building after last year’s recession.

Higher producer prices could start filtering through to consumer inflation, but this is unlikely to change the medium-term interest rate outlook after the Reserve Bank signalled last week rates will stay on hold for a while.

Statistics South Africa said on Thursday PPI, representing domestic output, quickened to 3,7% year-on-year in March from 3,5% in February, although it slowed to 0,3% from 0,4% on a monthly basis.

A Reuters poll last week showed PPI was expected to quicken to 3,9% year-on-year and 0,5% month-on-month.

“It’s certainly better than expected but I think the upward trend on the producer side is concerning and will eventually put pressure into consumer prices, even if only in 2011,” said KADD Capital economist Elize Kruger.

The rand was steady at 7,38 against the dollar at 1020 GMT, while the yield on the 2015 government bond was flat at 7,835 percent.

Analysts said the acceleration in the March annual PPI figure was largely due to base effects after South Africa’s recession last year, the first in nearly two decades, which resulted from depressed local and global demand.

“We expect producer inflation to continue ramping up sharply this year,” said Investec economist Annabel Bishop, saying the Reserve Bank was unlikely to cut interest rates further despite a drop in March consumer inflation to 5,1% from 5,7 % previously.

The Reserve Bank has cut interest rates by 5,5 percentage points since December 2008 — the last 50 basis point reduction in March — to help spur economic growth — but Reserve Bank Governor Gill Marcus said in a speech last week the key repo was likely to remain flat for “some time”. – Reuters

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