the bank to use such information as part of its data for policy decisions. i do not think that this is particularly controversial. a related, but more complicated issue, is the question of whether the bank should follow the market when it comes to setting interest rates. in other words, should monetary policy simply set interest rates on the basis of market expectations? today it is generally accepted that monetary policy should be sufficiently transparent so that the market can discount changes in monetary policy in advance. if the market correctly anticipates monetary policy actions, there will be little reaction to monetary policy announcements. one way of achieving this favourable outcome is to simply follow market expectations. however, if there is effective communication, market expectations of central bank actions will not be independent of bank actions and signals. indeed, an important dimension of monetary policy is to influence market expectations. under such circumstances, interest rate expectations are not formed independently of the view that the market has of central bank actions. in other words, if we signal a change in the monetary policy stance, this will be reflected in current market rates ahead of the actual change in the policy stance. under such conditions, although it could appear that we are following the market, we are in fact leading it. blinder, in his book “ the quiet revolution ’, also warns against central banks becoming too respectful of markets. he argues that slavishly following the market could lead to poor policy for a number of reasons. firstly, there is the problem of herd behaviour, which may or may not be rational, in speculative financial markets. this results in overreactions to stimuli whereas monetary policy makers need to proceed with caution and prudence. secondly, speculative bubbles are a fact of life. as blinder graphically puts it, ‘ central bankers must steadfastly resist such whimsy and inoculate themselves against the faddish behaviour that so often dominates markets. that may be why central bankers are not much fun at parties ’. finally, he argues that market traders tend to have much shorter time horizons than central bankers. this is even the case where long - term bonds are traded, but are in fact treated as shorter - term instruments. the result is that by following the market, monetary policy could land up having a short time horizon and be prone to overreaction. it is important for monetary policy to maintain a focus on the medium term. we have to see through the short term noise and not be blinded by it. 4. communication

price stability. it should, however, be realised that the interest rate is the price for money. the reserve bank can only influence short - term interest rates through the application of monetary policy operational procedures. although shorter - term interest rates influence the level of longer - term interest rates, other factors are also important when determining these rates. for example, at times you may find that the reserve bank reduces the repo rate, which lowers money market interest rates but leads to higher longer - term interest rates because of expected higher inflation. the reserve bank therefore only has an indirect influence on the level of the long - term interest rates that affect investor decisions. moreover, the reserve bank cannot arbitrarily set short - term interest rates without taking careful note of underlying economic and financial conditions, and it is not the function of the bank to promote economic growth in an artificial manner. at most, the reserve bank can only create stable financial conditions, which are generally regarded as an important precondition for high sustainable economic growth. this we have attempted to do over the past decade in a way that would have the least harmful effect on real economic activity. the policies followed by the bank, together with fiscal and other policy measures, succeeded in creating greater price stability in south africa. in 1998 and 1999 the rate of increase in the consumer price index excluding mortgage interest costs ( cpix ) averaged 7 % a year. this rate of increase can be compared with inflation rates fluctuating around 15 % in the 1980s and early 1990s. the endeavours of the reserve bank to create these stable financial conditions were at times seriously hampered by exogenous shocks, particularly by volatile capital movements. in the past year we were again influenced dramatically by this volatility in foreign portfolio investments in south africa. non - resident investors sold large amounts of domestic securities because of socio - political events in africa, a shift of funds away from commodity - based countries to high - technology and manufacturing - oriented economies, a rearrangement of portfolios as a result of surging energy prices and higher international interest rates. after being net investors in south african bonds to the amount of r16. 5 billion from the beginning of 1999 until the end of january 2000, non - residents became net sellers of bonds totalling r15. 3 billion in the next six months up to the end of july 2000. moreover, the net purchases of shares by non - residents on the johannesburg stock exchange fell from r40. 6 billion in 1999 to only r