cutting rates, which seems like the right thing to do, only increases inflation further and eventually undermines job creation further as well. like other central banks, we already include concern about growth and employment in our taylor rule. and because we apply the framework flexibly, we don ’ t respond with policy to every upward move in inflation. the difference between a flexible inflation target and a dual - mandate central bank just isn ’ t very meaningful. over time, keeping page 8 of 11 inflation expectations low and well - anchored is the clearest and most effective way of helping the economy to achieve full employment. another alternative is to target the exchange rate directly. keeping it perfectly stable would, at least on the surface, suggest a better fit with the letter of the mandate in the constitution. but it is often not well understood just what maintaining a fixed currency actually means, or what this requires in terms of policy. in a nutshell, fixing the currency requires fixing it against another currency or a basket of currencies. then, our monetary and fiscal policies are required to adjust regularly to keep the rand ’ s value stable against those currencies. but those third currencies keep moving, and this means that we need to move our policies in line with their moves, even when the economic cost may be high. to give you a concrete example of how problematic this can be, let ’ s consider the case of argentina in the early 1990s. argentina had pegged its currency to the us dollar. but argentina was not as productive as the united states ( us ), despite the peg giving them a similar inflation rate. eventually, argentina could not afford to maintain the peg, as the peso ’ s value was under pressure to fall and the country had no reserves left. the peg was dropped and the economy fell into a deep recession, with very high inflation, massive job losses and a sharp rise in poverty. you may think that argentina is an extreme case, but it demonstrates how a country ’ s policies can become subordinate to, and ultimately determined by, the actions of other countries. our inflation - targeting framework and floating currency means that we have considerable freedom to set our policies in line with the inflation outcome that we want to achieve. some commentators have suggested that this freedom to float the currency means that our monetary policy works against export - led growth. our currency is too strong in this view. it is worth reminding ourselves of what the international growth panel, led by prof. ricardo hausmann

their return is higher relative to the cost of production. but this is not ‘ time - consistent ’. when workers respond to their real loss of income ( higher inflation minus last year ’ s wage level ), they ask for higher wages and the cost of production rises. suddenly, the business is not more profitable anymore, cannot sell more of its product, and retrenches. in macroeconomic policy, the temporary gain of the phillips curve is illusory. you end up with less employment and higher inflation. your ‘ misery index ’ increases – and yes, there is such a thing, invented by arthur okun, and it measures exactly that. finally, i would like to note that the third group that gets hurt the most by higher inflation includes those that cannot defend themselves from it : the poor. without the power to demand higher compensation for inflation, the poor and those living off fixed nominal incomes, pensioners in particular, are most vulnerable. it is for these people, above all others, that low inflation is both morally and economically right. at the end of the day, central bank independence allows the sarb to hear what different interest groups have to say, but gives it the policy space to make decisions about inflation that on balance benefit all. by having an inflation target range, we make a commitment to explaining transparently how we have achieved that target. monetary and fiscal policy coordination independence also matters for ensuring effective monetary and fiscal policy coordination. page 6 of 11 much monetary theory involves figuring out how to avoid high inflation and its impoverishing effects. sometimes high inflation is caused by the excessive ambitions of sovereigns to spend fiscal resources on projects that do little to generate long - run economic growth. continuous fiscal deficits reflect those ambitions, and because those deficits are financed with debt, they create a tax liability for citizens in the future. when debt rises too rapidly and above certain levels, our borrowing today both constrains what future generations of south africans can do ( as they are forced to repay our debt ) and undermines their own living standards ( as they pay the higher taxes ). all of this directly generates pressure to allow inflation to rise. we cannot blame future generations for this. it is a function of the choices we make now. some of you may disagree with this and argue that governments need to address social deficits and therefore will always run large deficits. but while i certainly agree that those social deficits need to be rectified, it has to