Bold rate cuts urged as factory prices stall

Business Day, Jan 30th

PRICE increases for goods leaving local farms, factories and mines eased to an 11-month low last month, subdued by falling fuel and metal prices and giving the Reserve Bank more scope to slash interest rates next week.

The annual rise in factory gate prices measured by the producer price index (PPI) retreated to 11% from 12,6% in November, well below consensus forecasts and adding to evidence that inflation is falling much faster than expected.

Coming on the heels of news that consumer inflation also slowed more than expected in the same month, analysts said the data sealed the case for a full percentage point interest rate cut at the Bank’s monetary policy committee (MPC) meeting.

“There is now clearly a window of opportunity for the Bank to be more aggressive in cutting rates,” said Stanlib economist Kevin Lings. “A reduction of 100 basis points is certainly very feasible at the MPC.”

The Bank signalled the start of an easing cycle in interest rates with a half percentage point cut last month, taking the repo rate down to 11,5%.

With inflation on the back foot and growth in the economy slowing to a near standstill, lending rates are expected to fall by another 2,5 to four percentage points this year.

“Today’s PPI figure is good news for the consumer inflation outlook, as it provides further evidence that both local and global inflationary pressures are slowing,” said Nedbank economist Carmen Altenkirch.

“We expect that the Bank may opt to front-load interest rate cuts, opting for more aggressive loosening early in the year followed by more modest easing in the second half.”

Government bonds extended gains prompted by the benign consumer price figures earlier in the week. The yield on the R157 bond due in 2015 fell 12 basis points to 7,34% yesterday.

It was the fourth month in a row that the annual rise in PPI slowed, after peaking at 19,1% in August. During the month, the PPI index fell 1,1%, the data from Statistics SA showed.

Most of that fall was spurred by lower prices for fuel and minerals, which have plunged in the past few months as a recession gripped the global economy.

Electricity costs and food prices at the agricultural level offset some of the downward pressure. Over the whole year, producer prices rose 14,2%, up steeply from 10,9% in 2007.

But analysts expect producer prices to subside dramatically this year, which will feed through to consumer inflation.

Efficient Research economist Doret Els predicts that the PPI will show an average 5,5% rise this year, tamed mainly by lower commodity prices, which make up most of the producer basket.
Price rises for exported goods eased dramatically to 4,8% from 11,2% in November, while the annual increase for imports also slumped to 3,4% from 6,3%.

But there are still concerns that volatility in the rand could tarnish the benign price outlook in SA by making imports more expensive. The unit depreciated by nearly 30% against the dollar last year, making it the world’s worst-performing currency.

So far this year, it has weakened about 4% against a trade-weighted basket of currencies.
“Any further weakening in the rand might reduce the expected sharp slowdown in PPI as commodities are often priced at import parity,” Altenkirch said. But she pointed out that the construction industry — SA’s fastest growing — had come under pressure as companies put expansion plans on hold.

That should help subdue prices of bricks, iron and steel.