showed a depreciation more or less equal to the inflation differential between south africa and its major trading partners. the more stable exchange rate also reduced the demand for forward cover in respect of outstanding foreign exchange commitments of south african residents. the net oversold forward book of the reserve bank, about which there is much misunderstanding in financial markets, declined from us $ 22 billion at the end of 1996 to less than $ 15 billion at this stage. the second gratifying development was that south africa succeeded in 1997 to arrest the inflationary pressures created by the 1996 depreciation of the rand. the rate of increase in consumer prices, measured over a twelve months ’ period, accelerated from 5. 5 per cent in april 1996 to 9. 9 per cent in april 1997. during the rest of last year, however, the rate of increase in consumer prices gradually drifted down to 6. 1 per cent in december 1997. on a seasonally adjusted annualised basis, the rate of inflation declined to 4. 1 per cent in the fourth quarter of 1997. against the background of the relatively successful financial consolidation process of 1997 and the progress made during the course of the year towards reaching overall financial stability, it is understandable why the turmoil in the international currency markets after the east asian crisis only had a limited effect on the south african situation. it hit the south african markets just at a time when the country had more or less completed painful adjustments to restore equilibrium after its own crisis of 1996. apart from the downward adjustment of prices in the equity market, the contagion on south africa from the currency problems in east asia appeared to have been limited. 4. prospects for 1998 at the beginning of 1998, south africa therefore finds itself in a much more comfortable situation than a year ago, at least as far as the overall financial situation is concerned. the improved conditions were already recognised by a gradual easing of monetary policy in recent months. bank rate was reduced from 17 to 16 per cent on 20 october 1997, and the money market shortage allowed to decline from r11. 1 billion at the end of november 1997 to r7. 6 billion at the end of january 1998 ( and r7. 2 billion last friday ). the more flexible interest rates in the money and capital markets drifted downwards. the monthly average yield on long - term government bonds declined from 14. 5 per cent in november 1997 to 13. 6 per cent in january 1998, and to 13. 3 per cent at the end of last week.

. this figure, however, still includes credit extended to local authorities. a refined version of the definition of bank credit extension to the private sector, excluding local authorities, indicates a growth of only 12. 4 per cent over the twelve months up to december 1997. be that as it may, the reserve bank remains concerned about the high level of bank credit extension in south africa over the past three years. bank credit extension is the main source of money creation, and the increase of 17 per cent in the m3 money supply last year raised the level of the total money supply to gross domestic product to 60. 2 per cent in the fourth quarter of 1997, compared to 56 per cent a year earlier. with a low income velocity of circulation at this stage, there is always the danger that idle money can easily be activated in spending on real goods and services. it is accepted, however, that a number of structural changes affected the developments in the major financial aggregates over the past few years which require discreet interpretation of the meaning of the observed changes. the almost explosive increases in the volume of transactions in the financial markets, for example, may have contributed significant amounts to both bank credit extension and the money supply. total turnover in the secondary bond market increased by 41 per cent in 1997 to an aggregate amount of r4, 269 billion. the number of shares traded on the johannesburg stock exchange almost doubled from 1996 to 1997, whereas the total value of transactions increased by 77 per cent to r207 billion. less spectacular, but also significant, increases were registered in the markets for derivatives and for foreign exchange. financial market operators obviously needed more cash ( money ) against the inflated turnovers. however, no central banker should ever become complacent about excessive increases in bank credit extension and in the money supply. even if such increases do not have any visible or proximate effect on real spending or inflation, the excessive amount of money, once it has been created, can easily be redirected, at some inopportune future time, into spending on goods and services. what is of even more importance, is that excessive growth in the banking sector, relative to real economic growth, can lead to a systematic decay in the health and soundness of the financial system. ample evidence of the dangers of persistent excessive expansion in the financial aggregates can be found in the recent frustrating experiences of many countries in south - east asia. it is, however, true that the excessive increases in bank credit extension and