difficult for senior management to properly control a firm ’ s activities and monitor the conduct and behavior of its employees. for these reasons, we need strong internal and external checks on banks — an area to which i will now turn. the complementary roles of regulation, supervision, and culture as i said earlier, a sound financial system is one that is safe and resilient, can support the 3 / 8 bis central bankers'speeches provision of financial services at a reasonable price to the real economy in good times and in bad, and promotes confidence and trust among its customers and counterparties. financial institutions should be prudently managed and subject to strong internal checks — including risk management policies and procedures, internal controls, compliance, and audit. meanwhile, an effective financial regulatory and supervisory regime should be as efficient, transparent, and simple as possible. i think these goals are broadly shared by supervisors and banks alike, which suggests to me that the relationship between supervisors and banks does not always need to be adversarial. indeed, a healthy dialogue helps this supervisory process to work well. for example, it is important that firms are proactive in revealing problems to their supervisors. and, individual institutions can certainly benefit from the horizontal perspective that supervisors bring to examinations. this perspective can highlight where the firm stands vis - a - vis best practices, or where there may be important vulnerabilities in its operations. of course, there is an irreducible amount of tension built into this relationship, given that each party ’ s roles, interests, and responsibilities will not always coincide. banks are naturally more sensitive to constraints on their profit opportunities or dividend policies and to the costs of regulation. they may also question how much protection is necessary — for example, how stringent the capital requirements or how severe stress testing assumptions should be. these are areas where i would expect perspectives to differ. supervisors are principally focused on compliance with laws and regulations as well as issues of safety and soundness. they also bring to their work a perspective on financial stability that may not match the more narrow interests of the firm. for example, supervisors seek to address the externalities created by the failure of a systemically important firm by imposing higher capital and other requirements than the firm would likely select if left to its own devices. the financial crisis is a vivid reminder that there can be many risks to financial stability, and of the need for strong internal and external constraints on banks. here, the “ three pillars ” of regulation, supervision,

feel it necessary to intervene in the exchange rate market nor were any capital controls imposed. we did, however, with a surplus position on our balance of payments, mop up extra liquidity from both portfolio and direct investment flows, and consequently managed to grow the official foreign exchange reserves. we have been consistent in our approach, and have maintained an easy stance throughout the crisis, given that inflation largely remained under control and growth was moderate. exchange rate appreciation has been both a positive and a negative, on the one hand lowering south africa ’ s trade competitiveness, but also helping to dampen inflationary pressures given the influence of the exchange rate on consumer prices. cpi receded from 13. 7 per cent in august 2008 to 3. 2 per cent in september 2010, at the same time growth slowed somewhat, never quite recovering from the recession, while unemployment increased to over 25 per cent. it is the combination of these factors, a large output gap, the absence of any significant underlying price pressures and a still dismal outlook for the global economy, that has given the bank room to manoeuvre and reduce the repo rate from 12. 0 per cent in 2008 to 5. 0 per cent in july 2012. however, since july domestic developments in the form of labour unrest, credit rating downgrades, and a widening in the current account deficit, have taken centre stage and been the prime determinant of exchange rate movements, which previously was primarily determined by movements in the usd / eur exchange rate and other global developments. the exchange rate of the rand has weakened considerably from just above r8. 00 against the usd at the beginning of august to levels close to r9. 00 against the usd in november. such developments, together with the lagged effect of higher food prices and higher wage settlements as seen in certain sectors of the economy, do not bode well for inflation going forward. a wide range of estimates have been released from various analysts trying to ascertain the potential impact of the rebasing and reweighting of the cpi basket in 2013. our own estimates indicate some upward pressure on both headline and core prices, as noted in the mpc statement, to the magnitude of around 0. 2 per cent on headline cpi. however, i should caution that these estimates are subject to the final set of price - updated weights which will only be published in january 2013, and as such, are subject to change. alongside a less favourable outlook for inflation,