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Economics Correspondent

THE Reserve Bank's monetary policy committee (MPC) statement yesterday did not clear up much of the confusion in the market about why a special meeting had to be called to lower interest rates.

Coming less than a month after the August MPC meeting, at which interest rates were lowered one percentage point, the decision to hold an urgent meeting yesterday threw the markets into a tizz.

Bonds rallied strongly while the rand weakened from about R7,30 to the dollar to R7,55 as investors bet that interest rates would be cut much faster than the market had expected.

From the data that has been released since the last MPC meeting, analysts could not understand what had prompted the Bank to revisit its monetary policy stance.

The situation was more confusing as the special meeting was convened only a month before the MPC was scheduled to meet again.

This environment has fuelled speculation and uncertainty aspects to which the markets do not take kindly.

While the outcome of yesterday's meeting a one percentage point cut in the repo rate to 10% was widely expected, the reasons for the urgency were far less certain.

So analysts waited with mounting anticipation to hear the MPC's justification for creating such uncertainty in the markets. Sadly, the MPC's statement did not help.

There was nothing dramatic in the MPC's reasoning for lowering interest rates yesterday. The inflation outlook remained positive, the MPC said, with CPIX (consumer inflation excluding mortgage costs) expected to fall within the target range of 3%- 6%, despite a slight rise in CPIX to 6,6% year on year in July.

The Bank's governor, Tito Mboweni, said its forecasts showed that the inflation target should be achieved for the forecast period, which he said stretched from this year to 2005.

He said the outcome of the inflation forecasting model was based on assumptions that were made earlier this month at the regular meeting of the governor and deputy governors of the Bank.

The assumptions made in the most recent inflation-forecasting exercise were different to those made during last month's meeting, resulting in a different outcome.

However, Mboweni did not elaborate . "All the outcomes indicate that we are well on course to achieve the inflation target if all things remain the same," said Mboweni.

The MPC also had at its disposal new research on inflation expectations, which showed that CPIX inflation expectations declined sharply in the third quarter.

According to the University of Stellenbosch's Bureau of Economic Research, CPIX inflation expectations for this year declined from 9% in the second quarter to 7,5% in the third quarter.

Evidence of actual inflation slowing this year had resulted in business and trade unions adjusting their inflation expectations downwards, the bureau said.

Lower inflation expectations had also been influenced by Statistics SA's revision in inflation figures, which resulted in CPIX being cut by almost two percentage points.

Household inflation expectations for this year were still relatively high, but dropped from 10% in the second quarter to 8,4% in the third quarter, according to the bureau.

The MPC also gave an outline of recent domestic and international economic developments that it said had improved the inflation outlook, giving the Bank enough room to ease interest rates earlier than expected.

Faster growth expected in the US and Japan would probably boost growth globally, but economic activity in Europe was still weak, which should not result in global inflation rising too soon. This would improve the domestic inflation outlook, the Bank said.

"World inflation is not expected to be a cause for concern in the near future," said Mboweni.

However, the MPC noted that domestic growth was quite weak, and although manufacturing and mining production picked up in July this year, output was still behind its potential. Coupled with this was a slowdown in bank credit to the private sector and money supply growth, further improving the inflation outlook.

Although these reasons probably do not shed much light on why the MPC decided to cut rates yesterday, given that they were being cut for a third time this year, this is certainly not something that will concern consumers and investors.