for non - financial reasons, and this may still be so in future. the more rational investor, however, may think twice before making an investment in a foreign currency, in a foreign country and perhaps also in the shares of a foreign company. in considering such a possibility, a few important macroeconomic realities will have to be taken into account. the first is that markets, the more free they become and the more efficient they function, also work more effectively as a catalyst for equalisation. for example, if the average rate of inflation in south africa over time is 10 per cent per annum and the average rate of inflation in the rest of the world is 3 per cent, nominal interest rates in south africa will on average be about 7 per cent above the level of nominal interest rates in other countries. differences in real rates of interest will reflect differences in the risk factor attached to investment in different countries. in the same example, the exchange rate of the south african rand will depreciate over time by about 7 per cent per annum. the depreciation in the exchange rate will therefore make sure that the converted rand value of a foreign investment will keep up with the value of a similar south african investment, adjusted for inflation. there are therefore no special gains to be made from the investment in a foreign currency. thirdly, taxation in south africa will be levied on income earned on foreign investments on the same basis as income earned in south africa. ( the taxation on “ passive income ” earned in foreign countries as referred to by the minister in his budget speech. ) foreign investments will, however, hold new risk exposures for south african investors, particularly in an environment of volatile international exchange rates. the timing of the transfer of an investment into a foreign currency can be detrimental. a south african investor who may have transferred his savings into a sterling investment earlier this year when the exchange rate between the rand and the pound was r8. 00 = £1. 00 could have lost 10 per cent of his investment within a very short period of time. last friday the exchange rate was back to r7. 10 = £1. 00. this brings into any foreign investment a new speculative element that does not exist in the local investment market. finally, very few private individuals in south africa have the knowledge and the expertise to manage foreign investment portfolios, and to assess the alien risk exposures that are connected to such investments. we should not, just because of sentimental reasons, make use of a new freedom

t t mboweni : monetary policy and south african bond market developments address by mr t t mboweni, governor of the south african reserve bank, at the south african bond market conference organised by the debt issuers association, johannesburg, 5 october 2006. * * * honoured guests ladies and gentlemen 1. introduction thank you for giving me the opportunity to open this conference on the south african bond market. there are several reasons for developing debt markets. the most fundamental reason is to make financial markets more complete by generating market interest rates that reflect the opportunity cost of funds at each maturity. this is essential for efficient investment and financing decisions. if bond markets do not exist, firms may have to finance the acquisition of long - term assets by short - term debt, and investment policies may be biased in favour of short - term projects. furthermore, debt markets can help the operation of monetary policy as prices in the long - term bond market give valuable information about expectations of likely macroeconomic developments and about market reactions to monetary policy moves. in my opening remarks today i will touch briefly on monetary policy and bond market issues. 2. monetary policy developments as you are all no doubt aware, monetary policy does not determine bond market yields. nevertheless, monetary policy and the bond markets do impact on each other in important ways. expected monetary policy developments are reflected in bond yields and we, in turn, get a lot of information from the bond market about market expectations concerning future monetary policy, inflation and growth. more recently, the development of the inflation - linked bond market has provided us with further insights into longer - term inflation expectations in the market. not surprisingly, the change in the monetary policy stance in recent months has been felt in the local bond markets. the repo rate had been unchanged for 14 months, but in june of this year, the monetary policy committee decided to raise the repo rate by 50 basis points, and this was followed by a further increase of the same amount in august. although capital market rates reflect expectations, these expectations are not always correct. at the time of the first increase, these changes were not fully reflected in bond yields, but we have seen a significant adjustment since then. although our actions took many by surprise, for some time we had been sounding warnings that we perceived the risks to inflation to be on the upside. our warning remains the same today, as we still see significant upside risk to the inflation outlook. our major concern remains the growth of household consumer demand which grew at an