INTEREST RATES
BRIAN KANTOR: Reserve Bank should react to new reality
The Reserve Bank’s monetary policy committee decided not to offer relief to the hard-pressed economy last week. This window of opportunity to lower interest rates was provided by declining rates of inflation and less inflation expected in future. If cutting rates was not opportune on September 21, when will circumstances ever allow the Bank to do so? The committee referred to a deteriorating assessment of the balance of risks. Risks to the inflation rate will always be present and will remain difficult to anticipate. What should be expected from a central bank is not accurate risk assessments, but that it will react appropriately to the new realities, especially to the effect on prices of changes to the exchange rate, to which the economy has proved particularly vulnerable.Such events are described as supply side shocks, to be distinguished from the extra demand that might be forcing prices higher. These supply side forces reverse as the exchange rate recovers or stabilises, or the ...
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