this source of anxiety came to the surface in summer 1997, when the intermediate - maturity yields paid by those core countries which had reached complete alignment started to rise in sync [ see chart 1b and 1c ]. the balance of market expectations seemed to be shifting toward a loose interpretation of the new regime. a conviction that was gaining ground was that the rapid descent of short - term rates in the converging economies of italy, spain and portugal would be matched by a gradual increase in the short - term rates of the low - yield economies. the two paths would meet somewhere half - way. this instability of market expectations did not go unnoticed in particular in the central banks issuing the currencies that had already converged. signs of an upswing were still tentative and price strains were not yet fully in sight in this core currency area. nevertheless, in october, pre - emptive action took place to forestall the build - up of an inflationary potential in the delicate phase of transition to monetary union. this interest rate move was a strong sign of determination. the policy message was reinforced through a consistent communication campaign which the central banks concerned, together with the european monetary institute, launched in the last few months of the year to explain the meaning of their action. the essence of the message was the following. the assumption made by some observers and by part of the market literature, according to which the entry interest rates in the euro on 1 january 1999 would be some kind of average of the interest rates of the composing currencies was totally wrong. on the contrary, the very construction of the euro was based on total continuity with the most credible national currencies. the concept of the transition was based upon “ benchmarking ”, namely convergence towards the best performers and not convergence towards a mean. the modest interest rate increase that took place in a small number of economies was designed exclusively to preserve monetary stability and inflationary expectations for the corresponding currencies which were the benchmark for the euro. the ecb itself, the soon to be born monetary authority, would be uncompromising in its role as guardian of price stability, in close continuity with its forebears. it was therefore fully justified that interest rate convergence inside the future euro area would take place progressively on the basis of a merge of the different yield curves of the various currencies with the benchmark yield curve corresponding to the core currencies that had already converged. how did markets react to that action? in particular

first quarter of 2004 as the rebound in manufacturing production made inroads into stocks. the continued expansion in economic activity at first seemed to have had the desired effect on employment creation and from 2002 onwards there were some quarters in which increases were recorded in the formal non - agricultural employment in the economy. on balance, employment creation in the non - agricultural sectors of the economy continued to be disappointing and it seems that the total number of persons employed declined in the current upward phase of the business cycle. the creation of employment opportunities will be crucial if we are to improve people's lives in the years ahead. considerably more success was achieved on the inflation front during the past year. the twelve month rate of increase in the cpix declined from a recent peak of 11, 3 percent in november 2002 to 4, 0 percent in december 2003 and then rose to a still low 4, 4 percent in may 2004. a number of factors have been identified in our monetary policy statements explaining this favourable inflation outcome, which i won't repeat again this evening. it is generally expected that the high petrol and diesel price increases at the beginning of june 2004 and increases in the prices of medical products would have caused inflation to rise in that month. this should only be a temporary upward movement, which will probably again be reversed in the subsequent month. projections using the sa reserve bank's econometric models indicate, however, that cpix inflation could move above the upper boundary of the inflation target range towards the end of the year. fortunately, this is also expected to be reversed relatively quickly and is not a significant cause for concern. as already indicated, the increase in domestic expenditure led to a marked rise in the volume of imports during 2003. in the first quarter of 2004 the volume of imports contracted owing to a decline in the imports of oil. the volume of south african exports has fluctuated around a more or less horizontal trend since the second half of 2001, which brought about a substantial deterioration in the real trade balance over this period. this was accompanied by an improvement in the average terms of trade of 2½ percent in 2002, 4½ percent in 2003 and by a further 2½ percent in the first quarter of 2004 in comparison with the fourth quarter of 2003. these favourable price developments were unable to prevent the current account of the balance of payments from moving into a deficit. the improving terms of trade nevertheless kept the deficit on the current account of the balance of payments at a level of about 1½ percent of gross domestic