can be expected, have deteriorated moderately, but on the whole still point to cpix remaining within target over the next three years. the bank needs to guard against inflation expectations worsening further and becoming entrenched. economic growth should remain robust, despite the fact that oil prices will most likely have a dampening effect on growth. the manufacturing sector appears to have weathered a relatively strong rand quite well, while global economic conditions are such that export growth should be maintained at a healthy pace. both consumer and business confidence should remain high, with the factors supporting consumer confidence in 2005 still effective in 2006 – healthy disposable income, structural changes in the economy, and still low nominal interest rates. money supply and credit extension should witness a mild moderation, alongside growth in the housing market. we have noted signs of cooling off already. expectations of interest rate increases are likely to dampen credit demand ( mortgage financing ) somewhat. however, certain country - specific factors are likely to support still high and positive rates of growth, namely, the participation of nonresident buyers in the local market, the emergence of a new middle class, strong consumer demand, and a general catching up in the local housing market with international developments. international developments point to a moderation but still healthy economic growth rates, and while the inflation outlook internationally has deteriorated, the overall picture remains benign. this should support both economic growth locally and limit inflationary pressures in the local economy. the balance of payments may witness a mild deterioration, however, capital inflows, both portfolio and foreign direct investment, should be sufficient to finance this. fiscal policy remains supportive of a non - inflationary expansion in economic growth. the bank will continue to build its foreign exchange reserves, and purchase foreign currency at opportune times in a manner that does not destabilise the financial markets.

of inflation. the major industrial countries were extremely successful with this new approach, and during the eighties most major economies succeeded in reducing inflation to relatively low levels, that is, in general to about 1 to 2 per cent per annum. this left but little choice for the smaller economies of the world to follow suit, particularly as the drive towards global financial integration gained more momentum during the ninety - nineties. the odd old - time economist who believes that contemporary monetary policy is on a wrong track, particularly in the developing economies, still surfaces from time to time. the counter - argument is often based on the so - called phillips curve or an assumed trade - off that is perceived to exist between inflation and economic growth. there is sufficient evidence to confirm, however, that in the longer term, maximum economic growth is invariably attained at the lowest possible rate of inflation. the development of the theory of rational expectations questions the validity of the existence of a phillips curve trade - off, even in the short term. be that as it may, a country such as south africa with its open economy can hardly maintain overall financial stability unless its rate of inflation stays more or less in line with the average rate of inflation in the economies of its major international trading partners and competitors. 2. the south african experience on recommendation of the de kock commission of inquiry into the monetary system and monetary policy in south africa, the south african reserve bank adopted money supply targets as the anchor for its monetary policy model in 1986. after the money supply increased by 27 per cent in 1988, and the rate of inflation at one stage rose over 20 per cent, the new monetary policy model of the reserve bank was implemented with more vigour, and the rate of increase in the money supply was gradually reduced to below 10 per cent in 1992. for two years in succession, the m3 money supply rose by about 8 per cent. almost as if by magic, the rate of inflation also declined to below 10 per cent in 1993, and stayed in single - digits for the next four years. in 1996, the average rate of inflation was only 7. 4 per cent, the lowest level for any calendar year since 1972. the reserve bank seems to have lost some of its tight grip over the money supply over the past three years, when the rate of increase in m3 accelerated to a level of about 15 per cent during each of the years 1994, 1995 and 1996. these were, however, extremely difficult years with major political and social reforms and the