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Tomorrow's interest rate decision by the Monetary Policy Committee (MPC) of the Reserve Bank is widely anticipated since it profoundly affects all South Africans. However, the key to engaging with the Reserve Bank is to understand the motivation for setting interest rates - that is, to maintain price stability - and the information that they take into account. In this regard, debates on monetary policy often result in shouting matches by Cosatu in order to score cheap political points - but the reality is that monetary policy is a very nuanced component of governance that requires a detailed understanding.

The following issues needs to be taken into account in this regard:

Monetary policy cannot respond to immediate inflation - any decision made by the MPC is done with a view of what inflation is expected to be like in 18 months time. So any comment on inflationary pressures, which might affect the MPC decision, needs to look forward to what the situation will be like in September 2011. Projecting individual price trends to such a long time horizon is difficult enough, not to mention assessing their interaction on consumer inflation as a whole. As such, any commentary that uses current conditions as indicative of what the MPC decision might be remains speculative at best. This should also clearly show that the ultimate decision of the MPC is the product of rigorous economic analysis by the Bank - contrary to many populist calls for drastic rate cuts.

The DA has always, and will naturally continue to, support the independence of the Bank. The Bank is after all a constitutionally sanctioned body much like the Constitutional Court or the Competition Commission. Without presuming to influence the decision of the MPC in any way, the following comments on the macro economy may be instructive for the public in understanding the SARB decision:

Higher inflation will soon become a reality in industrialised economies as they emerge from the recent economic downturn. This pressure will filter through to South Africa by means of internationally priced commodities.

Services inflation makes out a substantial part of the Consumer Price Index (CPI) - the main metric which the SARB targets. Electricity price increases and increases in other stealth-taxes such as higher tariffs for airline tickets will all add up to consumer inflation.

The most significant portion of services inflation; rental prices - used to proxy the cost of owning a residential dwelling - might also pick up slightly through the year due to increased demand for housing during the Fifa Soccer World Cup. This is of course a localised occurrence to host cities, but the result might be a strong signal for rental inflation sent to the rest of the country. Knowing that rental prices are notoriously sticky - i.e. it won't be reduced in the wake of falling demand - it is more than likely that the trend set by the tourists will last well into 2011.

Sticky wages is also problematic - there has been very little proof that wage negotiations have resulted in increases that is equal to or less than expected inflation. On the contrary, because wage setting is traditionally backward looking - i.e. taking the view that the inflation of the past year should influence the increase in wages - this component of the CPI would normally hamper a reduction in inflation.

Under these circumstances, without in any way attempting to influence the decision of the Bank, a hold on the interest rate is likely.