aimed at keeping inflation low is anti - growth is simply wrong. there is no permanent trade - off between inflation and unemployment, and even the short - run trade - off tends to be elusive in an environment where expectations formation is increasingly sophisticated and forward - looking. that said, getting from high inflation to low inflation requires a sustained tight monetary policy. it cannot be denied that a tightening of policy will tend to hurt short - term growth, just as getting fit invariably requires some sacrifice by the athlete. but south africa ’ s experience under formal inflation targeting has been relatively favourable. when in late 2001 and during 2002 the inflation targeting framework was severely tested on account of an extraordinary depreciation of the exchange rate of the rand which fuelled inflation, the bank had to raise short - term interest rates by a total of 4 percentage points. alongside a conservative fiscal policy and a recovery in the exchange value of the rand, this was enough to first brake and later on reverse the acceleration in inflation. this was done with quite limited loss of real output, partly because of the stimulation to the tradables sector imparted during 2002 by the over depreciated exchange value of the rand, and partly because policymakers deliberately refrained from raising interest rates excessively, mindful of the lags characteristic of the transmission of monetary policy to the economy. thorough investigation of the business cycle reveals that the economy remained in an upward phase of the business cycle throughout the period of tighter policy in 2002 and 2003. in fact, the upswing has now been sustained for some six years. being directed at combating inflation with a medium - term orientation, the other side to the coin of the inflation targeting framework which has been adopted in south africa is that real interest rates are likely to remain positive under virtually all circumstances. this supports balanced and sound growth, inter alia by ensuring that the relative prices of the factors of production are reasonably aligned with their true scarcities. previous experimentation with negative real interest rates in the 1970s and 1980s contributed to suboptimal allocation of scarce capital, excessive capital intensity in production and weak growth outcomes. avoiding this obvious pitfall is a very important contribution which monetary policy can make, at the same time helping to ensure fair returns to savers and combating the deterioration in the national saving rate. what monetary policy cannot do unrealistic expectations regarding what monetary policy can do abound. while monetary policy can contain inflation, reduce inflation risk and uncertainty premia in the economy, ease

prospects, which could result in a tightening of monetary policy and the stresses and strains of servicing that debt at a higher interest rate. and talking of deterioration in inflation prospects, the latest ber inflation expectations survey of course showed higher expected inflation than before. in the wake of oil price trends during the past year, this did not really come as a surprise. however, 25 months of cpix inflation within the 3 - to - 6 - per - cent target range has demonstrated that low and stable inflation can be achieved and remains a priority of economic policy. the monetary policy committee will not allow price shocks to develop into sustained inflation spirals, but will be vigilant, safeguarding the gains made in combating inflation. conclusion central banks combat inflation precisely in order to nurture economic and employment growth – balanced growth of the sustainable types. the south african reserve bank will certainly not neglect its duty in this regard. but let the debate continue. maybe in the process all of us will learn new lessons on how to do things in a nuanced manner. once again, thank you very much for affording us this opportunity to interact with such an august gathering of people interested in high economic growth and employment creation. thank you very much. 4 / 4