there is better equilibrium now between real total domestic production and real total demand ; the overall balance of payments is in surplus and the capital inflows up to the third • quarter exceeded a relatively small current account deficit ; in the financial sector, both money supply and bank credit extension still increased at • relatively high rates over the past year, but slowed down significantly over the past few months ; the total gold and foreign exchange reserves is now at a more comfortable level than at • any stage last year ; • • the rate of inflation has declined since the first quarter of this year and the rates of increase in both consumer and producer prices will hopefully continue on a downward path ; the average nominal effective exchange rate of the rand stabilised over the past year. not everyting is, however, favourable for an expected economic recovery in south africa next year. in our forward planning we must take account of : the possible adverse effects on the global economy of the present problems of certain east asian countries and japan ; the adverse effects of the lower gold price, particularly for the official objective of • increasing total formal sector employment in south africa ; and the threatening danger of adverse climatic conditions because of the el nino effect. • on balance, south africa can with justification look forward to a better economic performance in 1998 after the successful consolidation period of 1997.

. the average value of the rand against foreign currencies for the first ten months of the year is about 6 per cent lower compared with the average value for the first ten months of 1996. 3. implications for monetary policy monetary policy decisions in south africa are guided mainly by developments in financial aggregates such as the money supply, bank credit extension, money market liquidity, market interest rates, the official foreign reserves and the exchange rate. there is, over time, obviously a relationship between developments in the financial aggregates and in real economic activity. the growth rates of most of the financial aggregates over the past few months showed a marked slowdown, particularly the rates of growth in the components of gross domestic expenditure, which already started to decline in the second half of 1996. critics of the reserve bank are often of the opinion that monetary policy should be linked more directly to changes in real economic activity, and not to changes in the financial aggregates. the experience of the 1960s and 1970s, when monetary policy was still guided by keynesian demand management principles, proved that premature relaxations of monetary policy could easily lead to “ stop - go ” or “ boom - bust ” economies, and to a persistent rise of inflation to a higher level after the completion of each successive business cycle. in the modern approach of supply side economies, monetary authorities in most countries now link policy changes with great success rather to changes in the financial aggregates. there is therefore a different and more effective timing of changes in monetary policy. taking account of developments in real economic activity in south africa over the past year, in the overall balance of payments and in the financial markets, the reserve bank adopted an easier monetary policy stance already in the middle of 1997. the bank acquiesced in gradual increases in money market liquidity, and also in the declines of market interest rates such as the yield on long - term government bonds and treasury bills, and on bankers ’ acceptances and negotiable certificates of deposit. the reserve bank endorsed the easier monetary conditions by reducing the bank rate from 17 to 16 per cent on 20 october 1997. 4. recent developments in the monetary situation since the last week of october, turmoil in the currency and capital markets overflowed the cauldron of certain overheated east asian economies and disrupted also the south african financial tranquillity. these developments led to some substantial selling of south african bonds and equities by non - residents, sharp declines in equity prices, volatile conditions in