better shape than ever before to weather broader financial turmoil. impact on east africa in east africa, our money markets have so far been relatively unaffected. our banking systems within the region had very little exposure to the sub - prime market and as such, there has not been a need for the bank of uganda or any of the regional central banks to provide extra liquidity to markets, for this purpose. based upon these trends and observations, there is reason to believe that, at least to some extent, east africa, which now enjoys a more stable regional financial economy than in the past, may equally be able to “ decouple ” from this slowdown that has been triggered off by events in the mortgage industry in the us and has impacted other countries such as the uk. our banks are now well capitalized in accordance with basel ii requirements and very liquid. in contrast to recent surges in us fed funds rates, our regional and domestic rates have not been affected by the sub - prime situation. furthermore, bou and sister central banks in the region have made a deliberate move towards the use of market - based instruments for monetary and fiscal purposes. this is a key aspect of the east africa community ’ s monetary and financial convergence criteria, and this has also enhanced our capability to respond to external shocks. for example, we now rely substantially on treasury securities sales and the use of repurchase agreement ( repo ) operations for the transmission of monetary policy. we also have developed our domestic debt markets and have seen a more diverse group of investors – including our pension funds, regional asset managers and non resident nationals and local retail investors – whom are increasingly investing for the long term. thus, overall, it would appear that our markets are far less susceptible to events in the markets of the developed world, than they may have been in the past. in particular, it may be noted that many of us are commodity exporters and many commodities are at record highs. we have also substantially shed the baggage of external debt and have built relatively strong foreign exchange reserves thereby making us less vulnerable to currency depreciation and other contagion effects. however, to say that we will be completely immune is very dangerous, since a significant volume of our regional commodity exports is to the us and uk and an increasing volume of investment inflows are from the us and the uk. also, the rapid movement of capital as result of globalization as well as the liberalization of capital accounts such as we have done in uganda,

be reached than starting at too high a level. the implementation of inflation targeting requires that the authorities must be able to develop a satisfactory forecasting framework. although south africa has experienced major structural changes in recent years, it seems that we are in a position to forecast inflation. the reserve bank already makes regular inflation forecasts using a large macroeconomic model which is based on a wide range of financial and economic equations. in the application of inflation targeting it will be prudent to supplement this large model with a number of smaller and single equation models. mervyn king, deputy governor of the bank of england, recently stated that forecasting, more than any other aspect of economics, brings the discipline into disrepute. forecasts should not be presented as a single number but rather as a probability distribution. the bank of england has accordingly adopted a so - called fan - chart forecasting technique which shows the relatively likelihood of possible inflation outcomes. careful consideration will have to be given to these techniques of other central banks before inflation targeting is introduced in south africa. it is important that the reserve bank enhances transparency for the effective operation of an inflation targeting framework. transparency introduces predictability and helps to ensure that expectations are consistent with the objective of price stability, thus lowering the cost of achieving the inflation target. as pointed out by prominent economists many years ago, monetary policy should avoid exacerbating fluctuations of output and employment by introducing unnecessary uncertainty. a transparent monetary policy will mean that changes in short - term interest rates should not surprise the market. markets should be able to anticipate decisions taken by the reserve bank. transparency should promote the predictability of policy. in this regard mervyn king has stated that a successful central bank should be boring, it is like a referee whose success is judged by how little his or her decisions intrude on the game. although the reserve bank has progressed considerably in recent years in providing more detailed information to the market and in explaining its policy stance, the bank has decided that with the introduction of inflation targeting it will improve the transparency of monetary policy further by periodic testimony to parliament, the regular publication of a monetary policy review report and focussed statements after the meetings of the monetary policy committee. in both cases the bank will provide an assessment of how it perceives the underlying economic and financial conditions and explain the monetary policy stance. conclusion although inflation targeting is a difficult monetary policy framework to apply in practice, most of the preconditions for its implementation can be met