. the bank was often criticised for not resisting the market pressures for higher interest rates, and for not providing more liquidity by using its unlimited powers to create more money. private business people, many home - owners and heavily indebted individuals, economists with vested interests in speculative financial operations, labour unions and some politicians, criticised the bank for its stance, and blamed monetary policy for all the ills of the economy. seasoned central bankers, however, know that the opposition to unpopular monetary policy measures gets more intense in situations when constraints are needed most, and when the catalyst of painful monetary adjustment is indeed producing the desired results. in this game, there is no gain without pain. wise governments know that this is the time for them to stand aloof of independent and often stubborn central bankers. south africans can be grateful for the country ’ s political leadership last year when the reserve bank was allowed to pursue unpopular policies in an unfriendly environment. the beneficial effects of the policies are now being reflected in recent encouraging developments in a number of the more important financial aggregates. 2. 1997 : year of financial consolidation at the beginning of 1997, the reserve bank predicted that the year ahead would be one of consolidation. time was needed to recover from the shocks of 1996 when foreign capital inflows suddenly subsided and left the overall balance of payments with a r5 billion deficit. in the process, the country ’ s official foreign reserves declined to the extremely low level of less than r14 billion ( in september 1996 ), and the average effective exchange rate of the rand depreciated by 23. 2 per cent from february to october 1996. monetary policy, which was tightened considerably during the course of 1996, had to remain restrictive throughout the major part of 1997. the reserve bank ’ s lending rate to banking institutions, which was raised to 17 per cent in november 1996, was retained at this level until late in october 1997. those market interest rates, such as the prime overdraft and mortgage lending rates of banking institutions that are closely linked to the bank rate, therefore also remained relatively high. the high level of interest rates reflected a continuing high demand for credit, against the background of a further marginal decline in overall domestic saving. total bank credit extended to the public and private sectors together increased by 16 per cent over the year. there was, however, some slowdown in the rate of increase in bank credit extension to the private sector from 17 per cent in 1996 to 14 per cent in 1997

arise from job switching and job reclassifications in a tight labour market. graph 7 wage price index growth * year - ended % forecast % * total hourly rates of pay excluding bonuses and commissions. sources : abs ; rba so that is a summary of our central forecasts. i would like to return, though, to a point i made at the outset : that actual outcomes can be quite different from the central forecasts. this is especially so in a global pandemic, with all its uncertainties. we still can't be certain how the pandemic will evolve and how people will respond to further outbreaks. there are also major geopolitical uncertainties at present and our major trading partner, china, is going through a difficult adjustment in its property market. domestically, one issue that we will be watching closely is how households use all the savings accumulated over the past two years. on the inflation and wages fronts there are also a range of significant uncertainties. these partly stem from the uniqueness of the period in which we are living. over the past two years there has been very strong demand for goods globally just at the time that the ability of the economic system to produce and distribute goods was impaired. this strong demand colliding with impaired supply means higher prices and higher published inflation. [ 1 ] it is still unclear as to whether, and at what pace, the demand for goods will normalise as infection rates decline. there is also uncertainty as to how quickly the supply and distribution problems will be resolved, although there has been positive news on some fronts recently. we can't rule out the possibility that some of the recent price increases are reversed as a more normal balance between supply and demand is re - established. in any case, for inflation to be sustained at current rates the prices of many goods would have to keep increasing at their recent rates, not just settle at higher levels. all of this means that there are significant uncertainties as to the persistence of the recent price pressures. they may be the start of a period of persistently higher inflation, but they could also simply be a shift in the level of prices as a result of this unique period. there are also uncertainties regarding the supply side of the labour market and how wages respond. we are experiencing a unique combination of record labour force participation, a pandemic preventing some people from working, and a gradual reopening of our international borders after they have been closed for two years. in