the objectives in an appropriate policy matrix. with the attention now being refocused on domestic policy objectives, the rising rate of inflation has become a matter of major concern. in this situation, the reserve bank regards it as a minimum precondition for arresting this imminent threat to financial stability that the rates of increase in bank credit extension and in the money supply will be reduced soon to more acceptable levels. with the prospects for real growth in the economy at a rate of between 2 and 3 per cent, and the desire to keep inflation to below 10 per cent, the money supply should obviously not increase by more than about 10 per cent during the current calendar year. this will require the reserve bank to persist with a relatively restrictive monetary policy for the time being.

) ; the minister of finance has confirmed and showed his determination to continue with the required policy of financial discipline that will gradually reduce the deficit in the budget as a percentage of gross domestic product. there is, however, still the danger of escalating inflation that cannot be swept under the carpet at this juncture. after reaching an acceptable low level of only 5. 5 per cent over the twelve months up to april 1996, the rate of increase in the consumer price index escalated to 9. 4 per cent in december 1996. inflation, however, lags behind changes in the monetary aggregates and is, at this stage, still stimulated by the depreciation of the rand last year, and the relatively large increases in the money supply during the 1995 / 96 period. it is of the utmost importance, however, that a restrictive monetary policy shall now be retained to make sure that the rate of inflation will also gradually be tamed again. 5. monetary policy options for 1997 it remains the main task and priority of monetary policy in south africa to fight against inflation. during 1996, the disturbances in the foreign exchange market temporarily diverted the attention from this prime objective of monetary policy. indeed, in the longer term, greater stability in the foreign exchange market will only become sustainable once the rate of inflation has been brought more or less in line with the average rate of inflation in the economies of our major trading partners and international competitors. despite the periodic efforts of media reporters to extort a commitment from the authorities to a certain pre - defined exchange rate for the rand, it remains our view that in the contemporary complex market for foreign exchange, it is not possible to define an equilibrium exchange rate a priori, or, in the case of the south african reserve bank, with the limited amount of foreign exchange at its disposal, to manipulate the exchange rate of the rand permanently in any direction against market forces. as far as the bank ’ s policy on foreign exchange is concerned, it is hoped that the more favourable conditions now experienced in the market will continue throughout 1997, and will enable us to pursue the longer - term objectives of : building up the total foreign reserves to a more comfortable level ; reducing the reserve bank ’ s role in the forward foreign exchange market ; and gradually phasing out the remaining exchange controls. to the extent that these three objectives provide conflicts within themselves, important policy decisions will have to be taken between the bank and the minister of finance on the relative importance that should be attached to each one of