south africans, we need to develop the policy and regulatory frameworks, and adjust our policy stance, to do as much as we can to offset harmful economic effects from abroad while taking advantage of the beneficial dynamics. above all, it means encouraging local economic growth and development, including the development of an active, integrated regional economy. our basic macroeconomic policy framework cushions against global economic shocks. it allows for flexibility in our approach to achieving the inflation target. the reserve bank has the responsibility and the latitude to identify and understand shocks to consumer prices as being temporary or permanent, and to view inflation pressures alongside economic conditions and developments in key markets. the gap between the economy ’ s potential growth rate, which is currently 3, 5 per cent, and its actual growth performance is an important factor in understanding the domestic economy. south africa ’ s economic stability is further supported by a macroprudential framework that has adjustable limits to the foreign currency exposure of south african households and institutions. the inflation targeting framework allows the exchange rate to be determined more fully by market forces than under a policy framework that tries to fix the currency. this has various advantages, with perhaps the key one being that movements in the currency help to moderate the very forces causing the currency ’ s value to move. when the currency depreciates, moreover, the costs to some economic agents are balanced by gains to other agents, like exporters. this in turn reduces the cost of international contagion to the domestic economy. this is a lesson learned well in some nordic economies. exchange rate flexibility has critical macroeconomic advantages for small open economies that either have diversified trade and financial connections to other economies and regions, or that desire some autonomy to determine their own monetary policy. sweden and norway, for instance, have extensive trade ties with the eurozone but also with north america and russia. economies much more closely integrated with larger dominant economies may find fixed exchange rates a more useful way of maximizing the economic gains of their relationship to the main trading partner. or usd $ 12 per barrel higher than at the time of the july mpc. the floating currency and independent monetary policy become especially beneficial for economies that need to adjust to negative economic shocks – both self - imposed and external. sweden discovered this as it adjusted to a severe balance of payments crisis in the period after 1991. 3 it enabled swedish banks and industry to restructure at a more favourable exchange rate and allowed the economy to achieve a more sustainable long - run growth path. the current

- wide risks are rising, and reduced in times of stress to ensure that the flow of credit is not undermined by regulatory constraints. 5 while there will be some important innovations, in general, the final basel iii capital proposals will make the global system look more like canada ’ s. the rigour of canadian capital regulation was an important – although far from exclusive – reason why the canadian system fared so well during the crisis. for the world as a whole, however, the changes will be substantial. consequently, some are concerned that the implementation of these reforms could be damaging to the economic recovery. this apprehension is misplaced for several reasons. first, business models and behaviour will adjust to the new rules. for example, measures to increase the capital held against trading books will encourage redeployment of capital from trading towards conventional lending. second, the transition timetable and grandfathering can be expected to be enlightened. the expressed intent of g - 20 policy - makers is to get the measures right and then to phase them in as financial conditions improve and economic recovery is assured, with the aim of implementation by end - 2012. we should not sacrifice our ambition for these measures to speed of implementation, nor the economic recovery to an arbitrary timeline. third, policy - makers are pursuing a number of ways to enhance the efficiency of the system by limiting the required increase in capital. these include contingent capital, countercyclical capital buffers to ensure that higher capital is only carried when necessary, building resilient financial markets, and enhancing the effectiveness of resolution mechanisms. policy - makers understand the desirability of providing as much certainty as possible as soon as possible. at present, the definition of capital, the deductions from it, the definitions of riskweighted assets, and the calibration of both the minimum requirement and the buffer all http : / / www. bis. org / press / p091217. htm. banks should carry enough capital to absorb credit losses and declines in trading book asset values associated with changes in economic fundamentals. on the other hand, it is a waste of society ’ s resources to expect them to also carry capital to cover unrealized losses that arise simply because market prices have become unhinged from economic fundamentals due to transitory factors, such as a breakdown in market liquidity. remain to be finalised. armed with the recent impact assessments, governors and supervisors will work quickly to make progress, consistent with the