January 16, 2020 / 1:55 PM / a month ago

UPDATE 2-South African central bank surprises with rate cut

* SARB lowers inflation forecasts significantly

* Says economy “weak,” vulnerable”

* First rate cut since July

* Analyst says cut could have little impact (Adds analyst, detail, context)

By Olivia Kumwenda-Mtambo and Emma Rumney

PRETORIA, Jan 16 (Reuters) - South Africa’s central bank unexpectedly cut its main lending rate by 25 basis points to 6.25% on Thursday, providing a stimulus to the flagging economy as it lowered its inflation forecasts significantly.

The rate cut was a unanimous decision and the first drop since July last year.

The majority of analysts polled by Reuters had expected no change in rates because of risks associated with a February budget speech and a scheduled review of the country’s last investment-grade credit rating by Moody’s in March.

South Africa’s public finances are under severe strain after repeated bailouts to ailing state firms like power utility Eskom and a steep run-up in public debt.

The South African Reserve Bank (SARB) painted a grim picture on the outlook for economic growth, lowering its predictions for this year and next to 1.2% and 1.6% respectively.

It called Africa’s most industrialised economy “weak” and “vulnerable” and said electricity supply constraints would probably keep activity muted in the near term.

Weak growth was a major reason why inflation remained under control last year, with consumer price growth hitting a nine-year low in November.

The bank now sees inflation at 4.7% in 2020 and 4.6% in 2021, versus forecasts for 5.1% and 4.7% previously.

“The lower inflation forecast and improved risk profile opens some space to provide further policy accommodation to the economy,” SARB Governor Lesetja Kganyago told a news conference.

The rand’s response to the rate cut was muted. It briefly weakened when Kganyago announced the decision before recovering to trade flat on the day.

Some analysts were doubtful that Thursday’s policy easing would do much to lift the growth rate, pointing to the need for meaningful economic reform.

“This cut is positive but one or even two cuts will not change things significantly for the outlook for the economy,” said Magdalena Polan, global emerging markets economist at Legal & General Investment Management.

President Cyril Ramaphosa has tried to revive investor confidence since taking office in February 2018. He has had some success cracking down on corruption, but his reform drive has been slowed by opposition within his governing African National Congress party. (Additional reporting by Joe Bavier in Johannesburg and Tom Arnold in London; Writing by Alexander Winning; Editing by Andew Cawthorne)

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