is instructive. during the period 2003 – 2006, the economy was growing at rates above potential, with an average growth rate of around 5, 5 per cent, at a time when the potential growth rate was estimated to have been around 4 per cent. the exchange rate was appreciating, partly in response to the commodity price cycle ; annual growth rates in credit extension were around 30 per cent ; real household consumption expenditure growth was around 9 per cent ; and house price growth was in excess of 30 per cent. had we had a macroprudential focus, such a combination of settings would have been a cause for concern, and may have elicited a policy response through higher interest rates. however, over that period, inflation was steadily declining and threatening to fall below the lower end of the target range when it reached a low of 3, 1 per cent, which could have required a further easing of monetary policy. there was perhaps a failure on our part to recognise this as a broader financial stability risk, and to react either with a tighter monetary policy stance, or with macroprudential tools. similar settings would probably result in a different response today, given our explicit financial stability mandate. how effective our macroprudential policies will be in solving financial stability issues and dealing with situations such as those described above is, however, still an open question. the expansion of central bank mandates to include financial stability explicitly could have implications for central bank independence. central bank independence is not absolute, however, and independence relates mostly to monetary policy at the operational level. the inflation targeting framework lends itself well to the separation of instrument and goal independence, in that generally central banks do not have goal independence ( as the target is usually, but not always, set by government ), but, in order to prevent the so - called political interest rate cycle, central banks have independence to pursue the mandate given to them. but, as i have stressed on a number of occasions in the past, we are not independent of the economy or society that we live in, and therefore we have to take a number of factors into consideration when making decisions. however, compared to financial stability, monetary policy decisions, while not easy, are more straightforward and better understood by the public. these decisions generally involve the use of one tool ( the interest rate ), although quantitative easing has complicated this argument, and there is a clear objective, even if there is some weight on output variability in the bank ’ s objective

dr. stals looks at current developments in monetary policy in south africa address by the governor of the south african reserve bank, dr. c. stals, at a luncheon of the rotary club of durban on 17 / 3 / 97. 1. monetary policy and total economic activity at this stage, there is general expectation amongst economists in the private sector that monetary policy will be eased during the course of 1997. differences of opinion may exist on how soon the easing will begin, or by how much interest rates will decline as a result of the easier conditions. this assumption is based, firstly, on a projection of some further slow - down in the rate of expansion of the total domestic economic activity. last year, the rate of growth in gross domestic production declined to 3. 1 per cent, down slightly from the 3. 4 per cent of 1995. it must also be noted that the decline in the rate of growth in the non - agricultural sectors was even more pronounced, where the rate of increase in total real value added declined from 4½ per cent in 1995 to only 2 per cent in 1996. in the very important manufacturing sector, the decline was from 7½ per cent growth in 1995 to only ½ per cent in 1996. it was a strong recovery in the agricultural sector that maintained overall growth at the level of 3 per cent plus for last year. agriculture will not make the same contribution to growth in 1997 and for economic analysis purposes it makes sense to assess the future prospects for non - agricultural production before deciding on a possible course for monetary policy during the rest of this year. there were some tentative signs that total manufacturing production may have started with a new expansionary phase in the fourth quarter of last year when a seasonally adjusted annualised decline of 1 per cent in the third quarter switched to a 2 per cent expansion in the fourth quarter. this expansion in production was boosted partly by a rising demand from the rest of the world for south african products, following the depreciation of the rand last year. this important development can make a further contribution to the maintenance of reasonable growth in 1997. developments on the demand side of the economy also indicated a marked slow - down in total economic activity last year. the rate of increase in total domestic expenditure declined from 6. 5 per cent in 1994 and 5. 2 per cent in 1995, to 3. 0 per cent in 1996. in this case, the decline was more broadly based and the rates of increase in gross domestic fixed investment, private sector