With subdued inflation, almost no economic growth and eye-watering levels of unemployment, it should have come as no surprise that the SARB’s Monetary Policy Committee (MPC) voted unanimously at the conclusion of its first meeting of 2020 to cut its key repo rate by 25 basis points to 6.25%.

Yet the consensus among economists was that the SARB would keep the rate unchanged, in part to help shore up the rand. But the currency has gained 2.6% against the US dollar since the last MPC in November 2019, so even that argument was starting to look a bit thin.

Inflation, and the expectations around it, was a key reason for the cut. It has continued to surprise on the downside, even though it is a trend one would generally expect when the economy is so weak and unemployment is so high. If inflation does take off against this backdrop, then South Africa will be stuck in the terrible rut of stagflation. But inflation shows no signs of taking off anytime soon, barring a dramatic oil price shock, or a plunge in the rand’s value.

“The medium-term inflation outlook has been revised significantly lower compared to the November forecast,” said the MPC statement, read as usual by Governor Lesetja Kganyago in a televised address. For 2020, the SARB now forecasts inflation to average 4.7%, down from 5.1% previously. Inflation expectations among markets and analysts are also lower.

The December 2019 Reuters Econometer survey of analysts sees 2020 inflation averaging 4.6% from 4.7% in the previous survey. And the consumer price index (CPI) was a moderate 3.6% in November 2019, which is close to the bottom of the bank’s 3-6% target range. Food inflation, which is especially hard on the poor and can fuel wage demands among lower-paid unionised workers, has also consistently been lower than expected.

This can be seen in some ways as testimony to the monetary policies the SARB – which remained “uncaptured” during the state capture saga of the Zuma years – has pursued. Relatively high rates have helped to keep a lid on inflation and that in turn has brought inflation expectations down. It has also served to attract scarce foreign capital among investors seeking yield. That, in turn, creates an environment for the MPC to loosen policy, which it just did. Further loosening could be in the pipeline during 2020.

But that is only part of the picture. Muted inflation is also a by-product of the economy’s woeful state and weak demand, and the repo rate was not the only thing that was cut. The SARB also whittled down its economic growth forecasts. For 2019, it now sees growth of 0.4% from 0.5%, and 1.2% in 2020 compared to the 1.4% it foresaw in November 2019.

“The MPC assesses the risks to the growth forecast to be to the downside. Escalation in global trade tensions, geo-political risks, further domestic supply constraints and/or sustained higher oil prices could generate headwinds to growth. Public sector financing needs have risen, increasing risk premiums and pushing borrowing costs for the broader economy higher,” the MPC statement said.

It also repeated this mantra: “Implementation of prudent macroeconomic policies and structural reforms that lower costs and increase investment, potential growth and job creation, remains urgent.”

The economy contracted in the third quarter, but the SARB is of the view that there was some growth in the fourth quarter, despite December’s shock of stage 6 load shedding.

In the Q&A that followed, the governor explained that even the impact of stage 6 was limited because it took place in December 2019, when the economy is typically winding down. Retail is one of the few sectors that thrive in December and Kganyago said initial indications suggested it did relatively well that month. Indeed, helped by Black Friday sales, November 2019 retail sales rose 2.6% year-on-year, higher than expected. But other fourth-quarter data is not so encouraging. Mining production, for example, contracted 3.1% in November.

But just as inflation has been surprising on the downside, so has economic growth. The rate cut is welcome, but will likely do little to stimulate growth.

“They’re treating the symptom, not the cause. This may help slightly at the margin, but South Africa’s monetary policy is not the reason the economy is not growing,” George Glynos, head of research and analytics at ETM Analytics, told Business Maverick.

Further rate cuts during 2020 are a possibility, but further cuts to the growth forecast are a probability. BM