is little doubt that positive outcomes may be realised. 4. the role of monetary policy central bankers have more often than not found that the role of monetary policy in the economic growth process is not fully understood or appreciated by all stakeholders. let me use the south african case to illustrate this difficulty. monetary policy in south africa is implemented within an inflation targeting framework – the target range being an inflation rate, namely cpix ( headline inflation less mortgage interest costs ) of between 3 and 6 per cent. cpix inflation in south africa has been outside the upper end of the target range for the past six months. in addition, there has been a deterioration in the inflation outlook. this has mainly been ( initially ) as a result of higher international food and fuel prices as well as robust consumer spending. however, underlying pressures have also become more broad - based. although credit growth has slowed somewhat in response to previous monetary policy tightening, persistently high food and fuel costs have meant that the risks to the outlook are on the upside. inflation expectations have consequently risen to the top end of the target range, with possible adverse implications for wage and price - setting decisions. these risks to the outlook have necessitated the tightening of monetary policy from 7 per cent in may 2006 to 10, 5 per cent currently. the tightening of monetary policy has not gone down well in all parts of society. not everyone appreciates that sacrifices – albeit short term sacrifices – are sometimes needed to secure medium to long term benefits. in general, due recognition is not always accorded to the role that price stability plays in securing sustainable economic activity. in our modern world where remote controls and microwave ovens are the order of the day, not everyone – market participants included – always comprehend or appreciate that monetary policy operates with a relatively long lag. so in essence, one of our primary challenges as central bankers relates to the issue of regular and consistent communication. communicating monetary policy has become complicated because the transmission channels have become somewhat clouded. structural changes in the economy have had an impact on functional relationships, with the result that the transmission mechanism of monetary policy has become more complex. advances in econometrics and economic theory have facilitated the construction of sophisticated structural models incorporating complex behavioural relationships. however, as professor david hendry argues, forecast errors are very often the result of unanticipated large changes or shocks within the forecast period 2. hence, anecdotal evidence that provides a better understanding of the risks to the inflation outlook is essential to

per year since the advent of democracy in 1994, compared to an average of below 1 per cent in the previous decade. over the last three years, however, growth has averaged about 5 per cent and the current trend in the economic growth rate is the longest experienced in the country's recorded history. 3. improved macroeconomic performance : some side - effects a side - effect of strong economic growth in many emerging market countries is the growing middle class. this has been particularly true for both india and south africa. the rapid emergence of this middle class brings opportunities that will have a significant impact on future prosperity but also poses a rather unique set of challenges for policymakers. with increasing affluence, there is bound to be a change in consumption levels and patterns. related policy concerns centre on the implication of these changes on the demand for credit, the level of imports and the effect on asset markets. then, there is the added concern that the unequal distribution of wealth brings with it a tension between the haves and the have - nots. under these circumstances, the broadening of access to financial services becomes an important policy objective. it is well recognised that the financial inclusion of the lower echelons of society into the financial sector is a powerful contributory factor to poverty alleviation through, for example, the provision of microfinance. as the demand for consumer finance increases, a greater range of financial instruments are needed and the financial sector will need to adapt. over the past few decades, alongside financial deepening, household debt levels have been on the rise across a number of countries, both in developing and advanced countries. rapid increases in household indebtedness have been associated with increases in asset prices, mainly house prices. these developments have indeed increased the probability of defaults, stemming in the main from adverse external shocks and rising interest rates. whilst household debt ratios in emerging market countries like south africa are low in comparison to developed countries, the rapid rise in household debt and credit levels has raised some concerns. in addition, high levels of inequality could mean that some groups are more affected than others. hence, the close monitoring of lending practices and detailed reviews of credit standards can contribute towards the integrity and stability of the financial system. in the case of south africa, an act of parliament ( the national credit act ) was introduced to address this issue. it is still too early to ascertain the impact that this act has had on borrowing and lending practices in south africa. there