to guide monetary policy. a “ check - list ” of an ad hoc mixture of intermediate objectives was introduced and the central bank was allowed a wide degree of discretion in the implementation of monetary policy. after the “ rule ” of monetary targeting broke down, the policy was “ to look at everything ”. although such a pragmatic approach may have some advantages, particularly in an environment of major structural changes and volatile international shocks, it has the major disadvantage of not being transparent. as charles goodhart put it : “ supporters would describe it as sensible pragmatism, detractors as a reversion to a muddled discretion which, once again, allows the authorities more rope than is good for them, or us ”. ( the conduct of monetary policy, economic journal 1989. ) both australia and canada, and a growing number of other countries, have recently moved to direct targeting of inflation. in all these countries, however, not only central banks but also governments commit themselves jointly with the central banks to a predetermined target for inflation. in the united kingdom, the chancellor of the exchequer indeed sets the target for inflation in his annual budget, and then instructs the bank of england to pursue the goal with its monetary policy instruments. nowhere does the central bank on its own decide on an inflation target. for an inflation target to be credible, there must be a commitment at least of the central bank and the government, and, if possible, also of the business community and labour, to the achievement of the goal. furthermore, it will do more harm than good for a country to introduce a formal inflation target that is much out of line with the rest of the world. of the seven countries reported in the bis annual report for 1996 with formal inflation targets, no one has set a goal for inflation of more than 3 per cent per annum. the central bank must be given sufficient operational autonomy to pursue the inflation target with vigour and without the fear of intimidation by politicians or other pressure groups. and, finally, markets must be free, flexible and responsive to underlying changes. inflation is often a symptom of malfunctioning markets and the cure lies not with monetary policy, but with a restructuring of the markets. it is a big challenge for south africa to prepare itself for this new age of direct inflation targeting as an anchor for monetary policy. the proposals made by the reserve bank last week for the introduction in march next year of a more flexible system of providing

the money supply or the amount of bank credit extension is used as an anchor for monetary policy. within the context of the prime monetary policy objective of maintaining low inflation, a monetary target ( or exchange rate target ) represents but an intermediate objective of the policy. south africa is one of the many countries that introduced money supply targeting as an anchor for monetary policy during the course of the 1980s. initially, the policy served the country well. it made an important contribution to a better understanding of policy decisions, and also made a major contribution towards the successful reduction in the level of the rate of inflation from an average of about 15 per cent over the twenty years from 1973 to 1992, to about 8½ per cent over the past four years. the south african experience with money supply targeting is not very different from those of other comparable countries such as canada and australia - - with the difference that the process in south africa is a slower and lagged one, mainly because of the economic isolation of this country from the rest of the world up to 1993. australia introduced money supply targets in 1976, and then abandoned them “ with reluctance ” in february 1985. at the time, australia tendered two reasons for ending the m3 - targeting stage : “ the first was the problem of controllability. the fact that targets were often missed was an indication that close control was either not possible, or would have required undesirable movements in the policy instruments. the second was the instability of the relationship between money supply and the ultimate objective of policy such as inflation... ”. ( address by governor macfarlane at a conference of economists in hobart, 29 september 1997. ) it was governor gerald bouey of canada at the time who made the famous statement : “ in canada, we did not abandon money supply targets, they abandoned us ”. in view of the liberalisation of the south african financial markets in recent years, the integration of the south african economy in the world financial markets and the increasing importance of large and volatile international capital flows, south africa may have reached the same stage now where the usefulness of the m3 - money supply as a target for monetary policy has been diluted to a point where some alternative anchor should be considered. following the demise of money supply targeting during the mid 1980s, both canada and australia went through a transitional period which lasted until the early 1990s. during this transitional period a policy of “ monetary pragmatism ” was followed. there was indeed no formal or strictly defined framework