South Africa's factory gate prices surged by 7.5 percent in the year to June, a 3-1/2 year peak which stunned local markets and suggested interest rates in Africa's biggest economy will rise more than expected.
Prices for government bonds dived on news of the annual increase in the all-items producer price index (PPI) - which was well above expectations and the biggest leap since January 2003, when it rose by 8.1 percent. "It's a shocker," said Johan Rossouw, chief economist at Vunani Securities. The question now is not whether rates will be going up further but rather by how much."
Domestic markets were betting that the central bank will raise its key repo rate by half a percentage point at its monetary policy meeting next week after kicking off a tightening cycle in June with a similar increase.
But the unexpectedly big jump in producer prices - which lead consumer inflation by several months - fanned speculation the South African Reserve Bank may raise its repo rate by a full percentage point to 8.5 percent at its August 2-3 meeting. "Obviously these are horrendous figures - much worse than everyone had predicted, probably due to rand weakness and strong oil prices," said Absa analyst Nyiko Mageza.
"This indicates the Reserve Bank will definitely hike rates next week. The magnitude of the jump means it could even be a 100 basis point hike instead of the 50 basis points we were expecting." On a monthly basis PPI jumped by 3 percent, accelerating from 0.9 percent in May and well above consensus forecasts for a 1.9 percent rise, the figures from Statistics South Africa showed on Thursday.