SA factory gate inflation slows in May, but Reserve Bank signals rates to remain elevated

The producer price index (PPI) data, unveiled by Stats SA on Thursday, is the latest sign that the cost-of-living crisis may finally be easing. It follows the braking of South Africa’s consumer price index to 6.3% in May from 6.8% in April. 

The CPI read, which came in at a slower rate than economists expected, raised hopes that the South African Reserve Bank’s tightening cycle was nearing its end, and the PPI number should support that viewpoint. 



But the SA Reserve Bank’s Lesetja Kganyago has warned before that the central bank is serious about containing inflation and he made hawkish comments on Wednesday, signalling that interest rates, currently at 14-year highs, will stay elevated for longer. 

“What is in no doubt is that policy is going to have to remain tight for a little bit longer than the market had been pricing. And the reason has been that inflation has been more persistent than we had thought,” Kganyago told Bloomberg TV on Wednesday. 

The SA Reserve Bank’s Monetary Policy Committee has hiked rates 10 consecutive times for a total of 475 basis points, taking the prime lending rate to 11.75%. This is adding to the burden of many cash-strapped households. Consumer confidence in South Africa has fallen into a heap partly as a result.

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But the SA Reserve Bank is determined to get inflation well inside its 3% to 6% target range and it is not there yet. So even though inflation is easing – PPI in July last year was 18% and CPI was at 7.8%, a 13-year high – the central bank is not taking any chances.

Still, slowing inflation – even if it does not translate immediately into interest rate relief – will help to lighten the load on many consumers.

The PPI’s food component on an annual basis notably slowed to 8.8% from 11.1% in April. Food inflation has been chowing into the incomes of households, especially those in the lower-income brackets, and any relief on this front is welcome.

“The cooling of food PPI further underscores our view that South Africa’s consumer food price will moderate in the second half of the year. Red meat, cereals, fruits, oils and fats will likely be the key products underpinning the slowdown in food inflation,” said Wandile Sihlobo, chief economist at the Agricultural Business Chamber of South Africa.

“Still, the relatively weaker rand exchange remains an upside risk to prices of imported products that could somewhat reduce the gains for local consumers. This mainly applies to rice and wheat, as South Africa is a net importer of these products,” he said. DM