Producer prices rose 0,7% versus those of December 2008, well above consensus forecasts for a 0,4% rise and on the heels of a 1,2% fall in November, official data showed yesterday.

The annual increase in the producer price index (PPI) was driven mainly by rising prices for oil, metals and agricultural products. Manufacturing product prices continued to fall, but at a slower pace.

“Despite the dovish stance of the Bank at the last monetary policy meeting ... the turn in the PPI trend may just provide reason to pause with any easing cycle (in interest rates),” said Standard Chartered regional research head for Africa Razia Khan.

At its monetary policy meeting this week, the Bank decided to keep the repo rate steady at 7%, citing the threat of electricity price hikes to an otherwise benign inflation outlook.

But it emphasised the weakness of SA’s economic recovery, and governor Gill Marcus admitted that some members on its

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monetary policy committee argued strongly for a rate cut. The bank lowered lending rates by five percentage points between December 2008 and last August in a bid to lift the economy out of recession.

“Our best guess is still that the repo rate will be on hold ... unless a change to the formal inflation targeting mandate of the Bank is mentioned in the February 17 budget,” Khan said.

The Treasury said this week that it and the Bank were addressing the “adequacy and effectiveness” of SA’s inflation-targeting framework, which is under attack from trade unions and some senior politicians.

Consumer inflation breached its 3%-6% official target for the first time since September last month, rising 6,3%.

But its effect on producer inflation has diminished since the PPI was overhauled at the start of 2008, making commodity prices more dominant. Sustained strength in the rand last year has helped to reduce the cost of imports.

Analysts say the trend in PPI will depend mainly on commodity prices, which have climbed 40% in the past year, and the exchange rate, which has started to weaken.

But if Eskom is granted a tariff increase of 35% every year for the next three years, as it has requested, it will fan producer as well as consumer inflation. A decision by the National Electricity Regulator is expected some time next month.

Electricity makes up 6,7% of the PPI basket of goods.

Last month, the PPI rose 0,7% compared with November, slowing from a 0,8% increase in the previous month, Statistics SA said yesterday. That was also driven mainly by higher prices for mining and agricultural products along with petroleum and coal.

Nedbank economist Carmen Altenkirch said: “The return of domestic producer price inflation reflects higher commodity prices, rather than demand-side pressures. As a result, today’s producer inflation has no short-term negative implications for consumer inflation.” Nedbank thinks the Bank will keep interest rates steady for the rest of this year, before raising them early next year as output picks up.

PPI for exported commodities fell 6,1% last month versus December 2008, and the component for imported products fell 3,5%. Investec sees the annual rise in PPI quickening to 2% this month, and climbing above 6% by the end of this year. But it does not expect the trend to have much effect on consumer inflation or monetary policy.

“While we currently expect no further interest rate cuts this year, there seems to be a growing possibility that one may occur in March,” it said in a research note.

In the year to last month, PPI for agriculture rose 1,2%, up from 0,9% in November. PPI for manufacturing dipped 1,9% after a 3,5% fall.