I would like to welcome the Deputy Governors of the South African Reserve Bank and other members of the Monetary Policy Committee to the second meeting of our MPC, and the last this year. The regular meetings of our committee are the most important feature of the formal and increasingly transparent decision-making process for monetary policy.
At our first meeting on 13 October, we introduced the members of the MPC to the public, so that ordinary South Africans could gain a better understanding of who the people involved in policy decisions are, and also to provide some insight into how decisions are taken. We issued a statement at the end of our day of deliberations to outline our monetary policy stance.
The Bank considered the international situation, trends in the South African real economy, domestic monetary conditions, trends in the money and capital markets, the balance of payments, financial stability and monetary policy developments.
After discussing these issues, the MPC decided to maintain the Reserve Bank’s prevailing monetary policy stance. However, we added that there were potentially unfavourable domestic and international factors which might necessitate a reconsideration of the policy stance, which we characterised as neutral.
The statement was rightly interpreted in the financial markets to mean that the Reserve Bank endorsed the prevailing trend in the repo rate, which was falling by one basis point a day. Consequently, the repo rate has continued to fall by one basis point a day, bringing the decline in the rate since our last meeting to 29 basis points.
The slow downward drift has taken the decline in the repo rate since banks last announced reductions in their prime overdraft rates, on 23 September, to 73 basis points. The gap between the prime overdraft rate of 15,50% and yesterday’s repo rate has widened to 348 basis points.
Against this background, we will review developments on the international front, and in the South African economy, to arrive at a decision on whether to modify or continue with our current monetary policy stance.
Without pre-empting our conclusions today, we will, of course, take account of the increases in key international interest rates that have occurred since we last met. The European Central Bank this month reversed the 50 basis point reduction in its refinancing rates which it implemented in April — a sign that the pendulum has swung the other way on inflation concerns. In the United States, the Federal Open Market Committee of the Federal Reserve Board this month raised its key lending rates for the third time in about five months, citing risks to sustainable growth. The Bank of England’s Monetary Policy Committee, which started tightening policy in September, lifted its repo rate early this month by another 25 basis points.
In some of the important emerging markets, short-term interest rates are still declining or stable. Many emerging economies are still recovering from the severe financial shocks of 1997 and 1998, but some countries, particularly those in Asia, have rebounded surprisingly strongly. In general, the outlook for world economic growth is encouraging, with the United States economy expected to consolidate as growth in other regions of the world accelerates.
In South Africa, too, the recovery appears to be gaining momentum and the growth outlook is positive.
Our discussions will be greatly enhanced by the availability of detail on the third quarter national accounts data, which should bring trends in growth, spending and the balance of payments into sharper focus. We shall pay special attention to recent inflation trends and the outlook for inflation.
There are also other important topics to be weighed up, such as the possible effects that concerns about the Y2K computer bug could have on banks’ liquidity and on the financial markets in general. To counteract liquidity pressures, the Reserve Bank has already brought down the banks daily liquidity requirement substantially.
We have a heavy agenda ahead of us, and once we have reached our conclusion at the end of the day, we shall again issue a statement to outline our policy stance to the markets and to the public.
In formulating our statement, we will take into account the need to send a clear and unambiguous signal to the financial markets on our monetary policy stance.
We have noted that some analysts, while welcoming the establishment of an MPC and the release of regular policy statements, have criticised us for not being clear enough about our policy intentions. We have taken their comments to heart, and hope that our statement at the end of today will address those concerns. We want to give them our strongest assurances that we are committed to promoting transparency.
That concludes my opening statement.
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