There was no surprise in the interest rate decision, which kept things as they were (repo 5%, prime 8.5%), but clearly the ground has shifted below our collective feet.

Will it shift some more, and in what direction?

During the course of this year, SARB along with the rest of us had to regularly recalibrate its bearings. Growth progressively disappointed, requiring downward outlook adjustments, while inflation entered a rebound that has become more vigorous towards the end of the year.

As things stand today, GDP growth for 2012 was lowered to 2.5% and 2013 is seen as 2.9%. These may remain down-payments on a somewhat greater downside yet to come into view. But it doesn't behove to cut forecasts too abruptly, instead preferring to move in small incremental steps, gradually sensitizing the senses to a changing world view, thereby also lessening the impression of having been rather deeply wrong. This of course applies to all of us in the forecasting business.

Believing less in precision but more in direction, I paint 2012 as being 2%-2.5% and 2013 to be 2.5%-3% (in both instances favouring the lower end of the range.

In contrast, the inflation forecast was revised up to 5.6% for 4Q2012 and 5.7% for 1Q2013, yet curiously omitting inclusion of the CPI reweighting effect (except opining it might be a relatively little 0.2%, which would be less than private estimates of up to 0.5%).

In the process, inflation was continuously seen within the target zone (a comforting view), yet it was allowed that next year there could be a breach on the upside.

Main inflation drivers were food, the Rand (having lost nearly 6% on trade-weighted since the last meeting), technicality (reweighting) and labour trends.

Nowhere did I gain the impression that SARB really believes in a spontaneous growth revival soon (despite the suggestive positioning of the decimal point) nor being prepared to assume the worst about inflation even if apparently thoroughly worried about where inflation thought it was going (leaving some leeway for inflation to relapse eventually back into the target zone).

This as preliminary observation.

Central to the controlled concerns of the SARB, however, is now the domestic labour issue, joining the old concern about disruptive global crisis potential, especially out of Europe and the US.

Whereas the outside world continues to be mentioned as highly risky for us (the SARB would be negligent if it didn't do so, though this is different from actually predicting another global crisis relapse), the real focus today understandably fell on our own doings.

Here we saw a prim reprimand being handed out to labour, in so many ways asking what it thought it was doing. There is clearly upward pressure on wages, yet it remains to be seen how much the wage bill will grow, given employers' likely inclination to shave employment.

Thus a gentle admonishment, for what is the use of slightly more real money for some if it comes at the expense of others losing their livelihood in a country saddled with 35% structural unemployment?

Be that as it may.

As with global crisis potential, SARB felt it necessary to warn about domestic wage-spiral potential and its possible impact on inflation, something it is clearly worried about and something it would react to, were it to take hold over and above the present 7.4% nominal wage trend and 6% unit cost tendency (accepted as being in line with a 3%-6% inflation target).

The inflation potential is clearly to the upside, possibly still food aided, but more labour based, directly through excessive wage and input cost increases, and indirectly if foreign investors were to keep walking away, further weakening the Rand.

If it wasn't for the rising inflation outlook, the weaker growth prospects may have tempted SARB by now into more rate cuts.

Equally, if it wasn't for the weakening growth outlook, the inflation upside now coming into view might have triggered talk of higher interest rates to come.

Instead, we are getting this straddling of no-man's land, with rates unchanged, as befits a flexible inflation targeter simultaneously wanting to resolve inflation gaps and output gaps as per the Taylor Rule.

As with the rest of us, SARB needs more time to see where all this is likely to lead, with focus on labour, employers and foreign capital driving the Rand.

If despite ongoing sporadic labour rumblings employers keep succeeding in managing their wage bills in a mostly inflation-neutral manner (somewhat more money for some, less jobs for others, worsening the structural unemployment and thereby the strategic growth challenge to government), the impact from labour on inflation next year may remain muted, with inflation spiking occurring at midyear towards 6.5% mainly only for technical reasons (and to be ignored as such) and thereafter renewed easing, hopefully back into the target range.

There seems less reason to assume that growth next year can be more vigorous than assumed. Even if global growth were to improve a notch more than assumed by the SARB, our domestic realities will likely be paramount.

Labour will be the key to output lost and business confidence subdued with its downside impact on private fixed investment, even with the political leadership pick behind us (as by then the 2014 election will loom large).

SARB specifically notes an absence of demand inflation (no surprise), the inflation rise is all supply-shock stuff, and provided a wage-spiral can be prevented the upward inflation potential could be contained.

If so, attention from early 2013 (post the US cliff and our leadership pick) may increasingly focus on slowing real income and faltering household spending growth, strained exports and restrained investment behaviour, with fiscal policy as accommodating as it can be.

If the Rand does not give way unduly (and support may be forthcoming from a post-cliff resumption of global risk-on confidence, continuation of Fed QE actions, and our domestic labour issue remaining more containable than perhaps now foreseen), the scope would remain alive for more monetary easing.

But for that to happen SARB will probably first want to taste the 2013 pudding, to see just what ingredients are being served up, something that isn't yet quite clear at this early stage.

And so with the SARB we should watch our unfolding labour scenery in 2013, and the response of employers and foreign providers of capital, looking for evidence of a budding wage bill spiral and more loss of foreign confidence feeding into a yet weaker Rand, or these features all remaining more manageable than perhaps now feared.

This is serious stuff, with especially our own doings next year tellingly shaping the prospect despite improving global prospects. In turn, it should decisively determine whether rates remain unchanged through 2013 or whether downside is created.

Upside for rates is to my mind for now still a bridge too far, as I don't expect either runaway wage bills or Rand.

 Source: Cees Bruggemans, Chief Economist FNB