is necessary. as we have consistently emphasised, we conduct monetary policy on a forward - looking basis. what our forecasts show, as published in the most recent monetary policy review, is that cpix inflation is expected to bottom out to average around 5, 7 per cent in 2004. these forecasts may of course be superseded by subsequent events, and we will be seeing the latest forecast at the forthcoming mpc meeting. however, most forecasts project a significant slowdown in the pace of at which inflation is expected to fall later in the year or early next year. bearing in mind that we should be focusing not on the upper end of 6 per cent but more around the mid - point of the target range, even if the latest forecast turns out to be more optimistic with respect to the longer - term outlook, it is unlikely to move right down to the mid - point. finally, this outlook for inflation is also supported by recent monetary developments. the year - on - year growth rate of m3 decelerated from 12, 8 per cent in december 2002 to reach 5, 7 per cent in march 2003. the quarter - on - quarter seasonally adjusted and annualised growth rate in m3 decelerated from 6, 9 per cent in the fourth quarter to 1, 9 per cent in the first quarter of 2003. similar trends have been observed in the growth rates of the narrower monetary aggregates as well. growth in credit extension to the private sector from the monetary institutions was also subdued, although the figures were distorted by regulatory and accounting changes of a technical nature which came into effect from january 2003. although private sector credit extension accelerated to twelve - month growth rates of 13, 8 per cent in february and 16, 6 per cent in march 2003, adjusting for the reporting changes, these growth rates would have been 9, 1 and 9, 3 per cent respectively. 3. recent labour market developments as our mpc statements have emphasised, there are a number of risks to the inflation outlook. one that is emphasised repeatedly is the trend of unit labour costs. in reviewing recent economic developments, we feel it is important to say something not only about unit labour costs, but also about some positive developments on the employment front. we often hear the criticism that inflation targeting is detrimental to growth and employment creation. however we wish to point out that these positive developments occurred within our inflation targeting framework. that is not to say that monetary policy should take credit for employment creation, but rather to illustrate the

see the rand making a strong recovery. although there can be no doubt that interest rate differentials have played a role in the recent strength of the rand, even market analysts are sharply divided as to the extent of this effect. on the one hand, the currency pessimists argue that it is all a question of interest rate differentials, and that once the bank starts lowering interest rates, the rand will retrace its steps to significantly weaker levels. on the other hand, the currency optimists point to the fundamentals, and in particular commodity price developments, and argue that the rand is around'fair value'levels, and that any interest rate reductions will have a marginal effect. some go as far as to say that there is still substantial scope for further recovery of the rand. whatever the case may be, the bank's focus is on the inflation target. the bank does not have a view on the appropriate value of the rand. obviously from an inflation perspective, a stronger rand is better than a weaker rand, but as we have emphasised on numerous occasions, it is not bank policy to intervene in order to influence the level or direction of the exchange rate. what activity there has been was for normal portfolio purposes. although there are disagreements as to the appropriate level of the exchange rate, there is general consensus that the more important issue is the volatility of the exchange rate. the volatility observed over the past few months is clearly not healthy for the economy. the uncertainty caused by such movements makes investment and export planning extremely difficult. what may seem a profitable venture under one exchange rate scenario, may turn out to be totally unviable should the exchange rate change substantially. unless the exchange rate is driven by the underlying fundamentals, trying to predict exchange rate movements can be extremely hazardous and adds to the riskiness of investment. although the expunging of the nofp was expected to eliminate an important source of volatility in the exchange rate, volatility is however a fact of life for most emerging market economies. in a recent bank for international settlements study comparing the experience of 12 emerging market inflation targeters with that of six of their industrial country counterparts, it was found that emerging market economies tend to be relatively more exposed to exchange rate fluctuations for a range of structural and historical reasons. the study concludes however that'in the longer run, … … improved inflation outcomes, consolidation of policy credibility and economic development can be expected to help reduce some of the