t t mboweni : icbs opening statement remarks by mr t t mboweni, governor of the south african reserve bank, at the formal opening of the 12th international conference of bank supervisors, cape town, 18 september 2002. * * * good morning ladies and gentlemen. on behalf of the south african reserve bank, welcome to sunny south africa. it is indeed a privilege for us to be hosting the twelfth international conference of banking supervisors ( icbs ). this gathering of the world's bank supervisors has been taking place every two years since 1979, in some of the most attractive venues in the world. and i am sure you will agree that cape town is no exception. the icbs has become an essential forum to promote cooperation among national banking supervisory authorities in the arduous task of supervising international banking. this year it will enable about 280 representatives from some 130 countries to exchange views on a range of current issues of common concern. one has only to glance at the programme and advance documentation to realise that icbs 2002 will be among the most important and most demanding for delegates ever held. the steady build - up of inter - linkages and complexity in global financial systems, the events of 11 september 2001, the protracted tardy growth in the key economies of the world, and the systemic financial crises in a number of emerging market countries have all contributed to an acute awareness of the inherent fragility of the global financial system. bank regulation and supervision is right up there in the first line of defence against financial instability, and from what i can see, the international best practice setting authorities have not dallied in responding to the challenges. extensive work by the bank for international settlements ( bis ), the basel committee on banking supervision ( bcbs ), the financial stability forum ( fsf ), as well as many other international organisations and national supervisory authorities, will form a solid base for the discussions in the next two days. the discussions on dealing with weak banks and international bank insolvency are clearly important in these times of turmoil. since capital is an effective, yet costly, buffer to protect depositors from the effects of banking problems, the scheduled discussion on the draft basel ii capital accord is very opportune. the draft accord holds the promise of ensuring that banks will have capital more relevant to their real risks, closing the gap between regulatory capital and economic capital, and eliminating many of the regulatory arbitrage opportunities that exist in the current framework. it is important that

, be short - sighted of the reserve bank to overlook inflation and consider only shortterm economic growth in its decision making. instead, what we try to do is balance the need for stable economic growth and low levels of inflation. we are cognizant that the current interest rate hiking cycle will have a short - term detrimental impact on the economy. however, the cycle thus far has been gradual and shallow by historical standards. this measured approach to monetary policy tightening reflects the difficult balancing act that we currently face. the reserve bank operates within a flexible inflation - targeting framework, which allows us a degree of discretion in responding to inflation target breaches. if we expect a breach to be temporary or to be caused by an external shock, we may opt to look through such an event. an external shock could be a once - off food price increase or a depreciation of the exchange rate. in the case of such a shock, we may look past the first - round impact and act only if we see evidence of second - round effects ( that this, if the shock feeds through more broadly into inflation ). for example, in both 2012 and 2013 inflation briefly breached the 6 per cent level. the breaches were temporary, so we were able to look through them and leave interest rates on hold at that time. the inflation outlook has unfortunately deteriorated since then, which has called for higher interest rates. last month, the mpc opted to lift the repurchase rate, or repo rate, by 50 basis points. this was due to a revised inflation forecast, which sees headline inflation remaining above the 3 – 6 per cent target range throughout the forecast period. our inflation forecast was revised higher in january due to the multiple supply - side shocks that i referred to earlier. while we are able to tolerate a single external shock for a limited period of time, we cannot tolerate multiple simultaneous shocks that are likely to keep inflation elevated for two years. shocks of this nature raise the risk that inflation expectations for the coming years will recalibrate to a significantly higher level. bis central bankers ’ speeches our monetary policy response going forward will depend largely on how surveyed and implied inflation expectations play out over the course of this year. we use the bureau for economic research survey of inflation expectations among trade unions, financial analysts, and business people as a guide. but a crucial indicator of implied inflation expectations is the level of actual wage settlements in the economy. wage settlements that are above inflation and productivity growth threaten to undermine