s reaction to the global financial crisis centred on a risk - averse philosophy and we responded to the deterioration in liquidity by tightening investment guidelines to reduce credit risk by limiting counterparty exposures. when a second wave of the crisis emerged in europe through potential sovereign defaults, the bank decided to rebalance its portfolios in order to manage exposures to affected peripheral euro area countries. foreign exchange reserves make up a significant component of total assets of central bank balance sheets. due to this concentration, central banks are subject to stringent reporting requirements from the general public, and more specifically, governments and shareholders. to this end, central banks have been developing sound governance structures, improving accountability through more transparency and introducing a culture of higher risk awareness across all their operational activities. efficient management of foreign exchange reserves has become vital for maintaining sound perceptions of central bank credibility. undoubtedly, a jukka pihlman and han van der hoorn ( 2010 ), procyclicality in central bank reserve management : evidence from the crisis, imf working paper bis central bankers ’ speeches loss of reputation through bad governance could undermine the ability of a central bank to perform its primary tasks of ensuring price and financial stability. good governance and sound functional organisational structures are therefore necessary for the efficient management of reserves. in establishing these structures, clear decision - making processes ; appropriate delineation of roles and responsibilities, clear execution guidelines, and accountability through adequately transparent regular reporting, should be well defined, documented, adopted and institutionalised. it goes without saying that there is no one correct way of establishing a governance framework, and that country - and institution - specific circumstance must be taken into account, while not compromising on the principles. borio et al note that there are two dimensions to consider in governance – vertical and horizontal governance. 2 vertical governance ensures that decisions are taken at the right level ( senior executives ), that is, where the strategic direction of the organisation is established. senior management of the institution should carry out the responsibility of oversight on the investment process and management of reserves. horizontal governance ensures that business areas and reporting lines are organised in a way that minimises the potential for conflicts of interest. the senior governing body needs to provide overall strategic direction through an investment management policy, which encapsulates the risk tolerance for the institution, while an investment committee should be responsible for the tactical position and for establishing the investment guidelines, and whereas day - to - day trading activities and taking active positions should be the

##ent to sudden changes in investor sentiment than they were at the time of the asian crisis in 1997 / 98. a major disappointment during 2006 was the inability of trade negotiators around the globe to conclude or, at least, continue with discussions in the doha round of the world trade organisation. there is no doubt that the major reason for the doha breakdown is to be found in disagreements over agricultural sector protection. the failure of these trade negotiations came as a major disappointment to developing countries in all regions, but the ultimate cost could be borne by both developed and developing nations. apart from the foregone opportunities for both developed and developing countries that a successful conclusion would have provided, of greater importance are the losses that all will be incurred if the world trading system is allowed to deteriorate with a reversion to protectionism. 3. domestic economic developments on the domestic front, 2006 has proved to be an eventful and challenging year, which has been influenced to a significant degree by the international developments that i have made mention to above. from a monetary policy perspective, we have continued to achieve our mandate, which is to keep cpix inflation within the target range of 3 - 6 per cent. inflation has been within this range since september 2003 which enabled us to reduce nominal interest rates by a total of 650 basis points between june 2003 and april 2005. in recent months the trend of inflation has been rising, and in october cpix inflation measured ( 5 % ) per cent compared to 3, 7 per cent in april of this year. furthermore our forecasts suggest that inflation could reach the 6 per cent level by the second quarter of next year. in response to the deteriorating inflation outlook, the monetary policy stance was adjusted in june of this year when we increased the repo rate by 50 basis points. the repo rate was increased further by 50 basis at each of the subsequent meetings in august and october. for much of the year, international oil price developments posed a major risk to inflation. the price of 95 octane petrol increased from r5, 49 per litre in january 2006 to peak at r7, 04 per litre in august. fortunately pressures on inflation from this source dissipated somewhat with the decline in the international oil prices and since august domestic petrol prices have declined by a total of r1, 07 per litre. despite this recent moderation, we still see the international oil price being vulnerable to global geo - political tensions, and therefore it continues to pose an upside risk to our inflation outlook