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.

##tralasia and africa have also been part of the global recovery to varying degrees. behind the euphoria, there are a number of factors that have been identified as posing a risk to the sustainability of the turnaround. firstly there are the imbalances in the us economy. the us trade and current account deficits may require an adjustment in us macroeconomic policies, if the required adjustment is not achieved through movements in the dollar exchange rate. some adjustment is inevitable as economic growth in the us accelerates. the challenge for the us will be to reverse its policies in such a way that does not undermine the global recovery and also achieves the desired effects with respect to the imbalances. the lenient macroeconomic policies of the united states in particular were an important element in bringing about the global recovery, and the challenge is to prevent the inevitable reversal of these policies from undermining the recovery. the recent positive employment figures emanating from the us have fuelled expectations that the tightening of the us policy stance will begin sooner rather than later. this will follow the lead of central banks in the uk, australia and new zealand which have already increased interest rates. secondly, a further risk to the global recovery is posed by the recent developments in the international oil market, where oil prices are moving inexorably towards the us $ 40 per barrel mark. this is a result of a combination of low inventory levels in the united states, the reduction in opec production quotas, tensions in the middle east, and political problems in a number of oil - producing countries. as recently as february it appeared that the pressure on prices would be short - lived as the opec basket price moved from around us $ 30 per barrel down to the us $ 28 per barrel level, the upper limit of the opec target range. unfortunately this turned out to be a temporary reprieve. the average price of the opec basket was us $ 32, 05 in april and us $ 35, 23 in the first week of may. although at this point it appears that this threat is more short term in nature, there have been warnings that excessively high prices could undermine the sustainability of the global upswing. despite the upswing in the global economy, there is no widespread expectation of a revival of generalised world inflation. the imf world economic outlook projects a decline in world inflation from 3, 7 per cent in 2003 to 3, 2 per cent in 2005. although a handful of countries are