Slower manufacturing price pressure points to a potential interest rate cut

Price pressures in the manufacturing and production part of the economic value chain increased below expectations last month, with input prices gaining 1% year-on-year, hinting at improved inflation figures and a potential interest rate cut.

Statistics South Africa’s print, released on Thursday morning, showed that the producer price index (PPI) gained 0.4% month-on-month in February. This is positive news as PPI is the leading indicator for inflation, which is currently at 3.2%. 

Old Mutual chief economist, Johann Els, said that PPI surprised on the downside, although he expressed some concern about the rate of increases of intermediate goods, which gained to 8.5% in February 2025, compared with 7.3% in January 2025.

The cost of intermediate goods has been rising for some time, said Els. He noted that this could adversely affect inflation ahead.

However, Dr Azar Jammine, director and chief economist at Econometrix, said that the figures boded well for consumer price inflation (CPI), which could come in lower than the South African Reserve Bank’s anticipated 3.9% for 2025.

In 2024, overall inflation was 4.4%, down from the average of 6% in 2023. Inflation in 2024 was the lowest in four years since the pandemic in 2020, when the average rate was 3.3%, Statistics South Africa’s data shows. 

As a result of lower price pressures, Jammine believes that “the central bank's got a lot of opportunity to cut interest rates. But whether they will is a different story.” This, he explained, was because of geopolitical issues, leading to a cautious stance.

Jammine still anticipates a 0.25 basis point reduction in interest rates at the next South African Reserve Bank Monetary Policy Committee meeting in May.

During the March meeting, rates were held steady with the repo rate remaining at 7.5%, while the prime lending rate stays at 11%, a pause following three successive 0.25 percentage point cuts.

The annualised increase in PPI was driven by food products, beverages and tobacco products, which cost 4.2% more month-on-month. Petrol, rubber, and plastic increased the overall hikes in price pressures for producers on a monthly basis.

However, Jammine noted that fuel prices had been coming down in recent months and could fall further. “There's nothing at the moment to be particularly scared of on the inflation front,” he said.

The annual percentage change in the PPI for electricity and water was 10.8% in February 2025, compared with 10% in January 2025. This index increased by 1.4% month-on-month.

The cost of electricity is set to start rising from April, following the National Energy Regulator of South Africa increasing the cost of electricity for Eskom’s direct consumers by 12.74%. However, Jammine noted that, given the large increase in the cost of power last year, “on a year-on-year basis, the impact on inflation wouldn't be quite as high”.

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Eskom’s initial ask for an increase in the cost of electricity was 36.1%.

The annual percentage change in the PPI for agriculture, forestry and fishing was 7.6% in last month, almost flat month-on-month although price pressures in agriculture increased 8.3% over the period.

Old Mutual Chief Economist, Johann Els, said that increases in fruit and vegetables as well as grain was “slightly concerning” but would not necessarily have a direct impact on inflation. There was also inflationary pressure in agricultural as well as forestry and fishing sectors, he said.

However, Els noted that some of these price pressures were seasonal, such as fruit and vegetables, while crop estimate numbers were “absolutely great”. He added that overall food inflation would be mild this year, although it was rising off a very low base.

Jammine explained that, although agriculture was seeing price pressures, meat costs were consistently coming down.

“Domestically at the moment, the economy is very weak as well, so there's no big demand that can push up prices,” said Jammine.

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