a six percent target, then interest rates will be exactly three per cent higher in the country with the higher target. if that country raises its target to nine per cent, then interest rates will end up rising another three percent. and if that country simply stops trying to control inflation at all, then it will become harder to borrow in its currency, with lenders switching to some other currency with more predictable inflation. in the short run, you can get lower interest rates by page 8 of 10 surprising people with higher inflation. but once they wake up – and investors aren ’ t slow to see higher inflation – interest rates have to rise. for this reason, one of the most effective ways for lowering interest rates is to keep inflation low and predictable. looking around the world, the evidence is very clear that low inflation countries have low interest rates and high inflation countries have high interest rates. in the extreme cases, such as sweden, inflation is so low they even have negative interest rates. sweden ’ s repo rate, for example, is currently at - 0. 5 per cent. by contrast, in countries with much higher inflation, like argentina or nigeria, policy rates are much higher. nigeria ’ s is currently 14 per cent. argentina ’ s is 26. 25 per cent. 12 so although it is the case that interest rates typically rise in response to higher inflation, on average interest rates are lower because of lower inflation. this is why inflation targeting is a way to get lower rates over time. this sets the context for our current policy settings. inflation in south africa has moderated in recent months. we now have a good chance of getting inflation down well within the middle part of the target. inflation is likely to move in this direction because of declining food inflation, our policy communications, the stronger exchange rate, and the sensitivity of price and wage setters to weak economic conditions. if we can keep inflation lower, anchoring inflation expectations, that should in turn generate a lower rate of interest to support the economy. unfortunately, we also have to worry about higher inflation if things go wrong – that is, if the exchange rate begins depreciating again, if wage settlements are excessive, or if our monetary policy communication isn ’ t heard, loud and clear. these factors limit our policy space. 13 the ratings agencies have been clear that the effectiveness of the central bank is one of the strongest pillars supporting this economy – a claim that speaks to both our price and financial stability mandates. we will

. the types of securities against which banks could borrow were broadened by the fed and ecb to include mortgage backed securities – the fed went a step further and accepted asset - backed commercial paper. the relaxation of key restrictions on lending between banks and broker / dealers also helped to reduce liquidity pressures as it allowed banks to fund their own and other non - bank dealers more easily. on 16 august, the federal open market committee lowered its discount rate by 50 basis points, returning some calm to markets. in the case of the united kingdom, it was necessary for the bank of england to provide emergency liquidity assistance to one financial institution, northern rock. as central banks rarely provide this kind of assistance easily to one institution, financial markets will continue to keep a watchful eye on possible subsequent developments in the united kingdom. the most significant action, however, was the 50 basis points reduction in the target federal funds rate and a further 50 basis points reduction in the discount rate by the fomc in midseptember. this had a pronounced impact on financial markets. risk appetite returned, and the vix index declined from over 31 index points to 19 index points by 21 september. stock markets rebounded between 7 and 16 per cent and bond yields increased as investors moved back into riskier assets. the increased risk appetite over this period led to the jpy reassuming its depreciating trend, from jpy112 in mid - august to jpy116 on 21 september. the usd, however, depreciated to over usd1, 40 against the eur, breaching the usd1, 40 level for the first time on 20 september, pressured by interest rate expectations. market expectations of monetary policy have changed markedly since these events from a general environment of tighter monetary policy to easier monetary policy. commodity prices have reached highs not seen for over 20 years. the gold price has moved above usd740 per fine ounce, but sadly, oil prices have also risen, to over usd80 per barrel. emerging markets also regained their composure since the fed lowered its target federal funds rate. the msci for emerging markets gained over 25 per cent since mid - august and the embi plus spread declined by 56 basis points. it is notable however, that throughout this crisis, there has been limited reaction from emerging markets. one can ascribe this to healthy economic fundamentals. emerging markets over the past few years have increased their reserve levels significantly, reduced their external balances