By Cees Bruggemans, Chief Economist FNB.
SARB Governor Marcus announced the MPC decision to cut interest rates by another 0.5% today, with the prime interest rate dropping to 9%.
The main emphasis was on a slightly lowered inflation trajectory, averaging 3.5% in 2H2010, 4.3% in 2011 and 4.8% in 2012, and the economy expanding at below potential, 2.8% in 2010 and 3.3% expected in 2011.
Though there are many future risks to be borne in mind, regarding uncertain financial conditions in the US and Europe especially, but also regarding global commodity prices such as oil and foodstuffs, with uncertain future impacts on the Rand, and therefore on domestic inflation and growth, these risks were not allowed to overwhelm the estimated inflation and growth projections.
Accordingly, SARB felt comfortable lowering rates by 0.5% though indicating that on presently available information this was considered to be the last rate cut of the cycle.
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In question time, the Governor was queried about this view that this may be the last rate cut, given that such statements have now been made a number of times these past 18 months and have turned out to be wrong.
The Governor answered very straightforwardly, indeed courageously, that these are particularly uncertain times, especially overseas, that the risks ahead are major and difficult to ascertain, and that one tries to the best of one’s ability to read these conditions and tendencies, make the right decision while providing some guidance to the public and markets as to what to expect in the future on the strength of presently available information and insights.
This was a very honest assessment of what it takes to analyse economic conditions, locally and abroad, the difficulty of deciding the right policy stance in the light of such data and risks identified, and to provide a view about what are ultimately difficult to assess realities going forward, yet now having to take a stand.
Quite clearly, SARB will at every MPC meeting evaluate all available data anew, and if it were to come to new insights, change its thinking accordingly, which might have a bearing on its actions.
In this respect it is important to have an open mind and to evaluate all information in an independent manner, beholden to nobody.
This philosophy comes through clearly at every post-MPC media briefing and we should appreciate the manner in which a difficult job is undertaken with an open mind at all times.
It ultimately represents Best Practice as can be observed worldwide and should be appreciated as such in our central bank.
Source: Cees Bruggemans, First National Bank, November 19, 2010.
