One of the few positive things that might be said about Reserve Bank governor Tito Mboweni's recent decision to cut interest rates by only 50 basis points is that he is in good company in keeping South African monetary policy too tight.

After all, Jean-Claude Trichet, president at the European Central Bank (ECB), is also stubbornly keeping European interest rates too high despite the inexorable appreciation of the euro.

Whereas Mboweni's decision is likely to be confined to damping SA's growth prospects, Trichet's decision will have far-reaching global implications given Europe's relative importance in the world economy.

In setting interest rates in a floating exchange rate system, central banks are supposed to be mindful of the damaging effects that sustained exchange rate movements might have on the economy.

In particular, they are supposed to recognise that, by reducing export and import prices in domestic currency terms, an appreciated currency discourages exports and encourages imports in a way harmful to domestic economic growth.

They are also supposed to recognise that, beyond damping inflation by curbing domestic growth, a strengthening currency directly lowers inflation by cheapening the cost of imports.

Since the start of this year, the euro has appreciated about 20 percent against the dollar and 10% against a broader basket of currencies. Moreover, in recent months, the euro's rise appears to have gathered pace, while U.S. balance of payments data suggests the euro will go on grinding up against the dollar.

Economic research suggests that a 10-percentage-point appreciation of the euro will slash Europe's economic growth by a full percentage point. It also suggests the appreciation of the euro will keep European inflation well below the ECB's 2 percent inflation target for next year.

This is hardly encouraging as Europe's major economies are barely emerging from the recession in the first half of this year. Yet Trichet still maintains European interest rates at 2 percent, or double those prevailing in the U.S. The only rational explanation for this is that, being new to the job, he is trying to establish his credentials as an inflation hawk.

Trichet is also not wanting to condone Germany and France recently flouting the Fiscal Stability Pact by an early interest rate cut.

The exchange rate case for further interest rate cuts is even stronger in SA than in Europe. Indeed, at an exchange rate of below R6,50 to the dollar, the rand has appreciated almost 40 percent against the dollar and 20 percent against the euro since the start of this year.

As is already evident in the negative rate of producer price inflation in the past 12 months, the appreciation of the rand is already having a major effect on SA's inflationary outlook. Experience suggests the full effect of the rand's appreciation will take several quarters to work its way through the economy as exporters and importers fully react to the rand's recent surge.

This has to be of major concern, given the paltry 0,75-percentagepoint economic growth rate recorded in the middle quarters of this year. Yet despite the real risks of having SA's economy again slide into recession Mboweni opts to hold interest rates at 8 percent, or at roughly double the CPIX inflation rate.

Such high real interest rates are hardly compatible with the economy regaining vigour at a time when the currency remains at a very appreciated level.

The probable cause of the hairshirt monetary policies being practised in Europe and SA lies in the inflation mandate of the ECB and Reserve Bank.

Unlike in the U.S., where in addition to pursuing the goal of price stability the Federal Reserve Board is legally obligated to pay attention to output and employment developments, the sole objective of the ECB and the Reserve Bank is the attainment of an inflation target.

One has to wonder whether the ECB and the Reserve Bank might not be being encouraged constitutionally to be overzealous on the inflation front at the expense of economic growth and employment.

Desmond Lachman is a resident fellow at the American Enterprise Institute.