Rand weakens on disappointing producer inflation numbers

The rand was softer against the dollar on Thursday afternoon, after producer inflation numbers came in worse than expected.

This raised the possibility that the Reserve Bank might consider interest-rate increases sooner than forecast, affecting already weak economic growth.

Factory and farm-gate inflation, as measured by the annual change in the producer price index (PPI), accelerated to 5.9% in June from 4.6% in May; economists had expected it to rise only to 4.9%

Higher producer prices have a knock-on effect on consumer inflation, with the effect set to be felt in the coming months. Local consumer inflation is already on the rise, but is expected to remain within the Reserve Bank’s 3% to 6% target range.

The rand had earlier found some support after leaders at the Brics conference committed themselves to free trade in the face of the US accelerating tariffs against imports from China. It firmed to a three-week best level of R13.0956 to the dollar as the latter weakened after President Donald Trump and European Commission president Jean-Claude Juncker agreed to working towards easing ongoing trade tension between the US and the EU.

On Tuesday, China pledged to invest $14.7bn in SA, but gave no details on how it would we spent. Lured by relatively low inflation and comparatively attractive local bond yields, foreigners have slowly been coming back to the market, boosting the rand in the process.

The European Central Bank (ECB) kept its key interest rates unchanged, as expected, with little fireworks expected from bank president Mario Draghi’s press conference later in the day. The ECB indicated in June that it would wind down asset purchases by the end of this year and suggested that rate hikes wouldn’t take place until late in 2019.

At 3pm, the rand was 0.7% weaker to the dollar at R13.2005 from R13.1086, at R15.436 to the euro from R15.3746, and at R17.3701 to the pound from R17.2959.

South African bonds were steady at firmer levels, with the yield on the benchmark R186 unchanged at 8.61%. The US 10-year treasury was last seen at 2.9593% from 2.976%.