macroeconomic policies, sound financial systems, and enhanced disclosure so that market discipline can work constructively. to this end, the reserve bank participates in the work of the bank for international settlements, where central bankers from around the world collaborate in research, and in developing international codes and best practices. the bank also participates in the financial stability forum, an international body that brings together central bankers, regulators, and government officials to address financial stability concerns. it is another example of the bank's forward - looking efforts to ensure that we are sufficiently prepared to withstand financial shocks should they occur. the bank also makes available senior personnel for international monetary fund missions to work in other countries. although the functions of the bank have changed and expanded over time, the formulation and implementation of domestic monetary policy remains one of the cornerstones of its activities. over the years the bank has applied various monetary policy frameworks. from february 2000 an inflation targeting framework was adopted. the adoption of this target formally entrusted a single monetary policy objective to the bank, namely, price stability. fully - fledged inflation targeting is based on important pillars that include an institutional commitment to price stability, instrument independence, an absence of other nominal anchors, policy transparency and accountability and specifies that fiscal dominance will not be applied. the success of inflation targeting depends strongly on central bank credibility that is derived from the market's belief in the reserve bank's resolve and ability to meet the inflation target. south africa adopted formal inflation targeting for three main reasons. in the first place, it was necessary to find the most credible and transparent monetary policy framework. this came after a period when money aggregate targets had at first proved less closely connected to the inflation rate than expected and the subsequent eclectic monetary policy framework had, among others, proved less transparent than hoped for. secondly, there was a desire to balance the bank's independence with more specific accountability. and thirdly, there was a desire to reduce the social and economic costs of high inflation by reducing the inflation expectations of both financial markets and agents in the real economy. in february 2000 it was announced that the reserve bank had to achieve an average rate of increase in the cpix measure of inflation of between 3 and 6 per cent for the year 2002. the cpix measure was chosen to ensure a wide coverage of consumer items, but without the mortgage interest component that would perversely fall as the reserve bank relaxed monetary policy, and vice versa. this inflation target measure was chosen because of the fact that it is the

, bedding down the appropriate legal framework, accounting and auditing standards as well as a reliable system of credit information on individual borrowers. turning to inflation prospects, there had been no indication during the first half of last year of any impending upward movement in inflation. south africa, in line with most of its trading partners, had experienced a slowdown in economic growth during the first half of 2001, but both fiscal and current account performance was strong and inflation was falling. there had been sustained fiscal rectitude and very strong revenue growth with the resultant favourable budget deficit to gdp outcome for fiscal 2001 / 02. as a result of improved macroeconomic performance and prospects in general, south africa earned investment grade status on its external sovereign debt from moody's in november 2001 while default risk spreads on south africa's external sovereign debt narrowed by some 130 basis points during the course of the year. given the fact that we are in an inflation - targeting framework, the reserve bank therefore does not have any intermediate targets or guidelines as was the case before the year 2000. the four measured and timely increases in short - term interest rates so far this year to counter the inflation spiral were entirely appropriate but inflation expectations have nevertheless continued to harden somewhat. the presence of some excess capacity in the economy should however help limit price pressures, but much also depends on movements in unit labour costs. it is still too early to assess the eventual second round inflation outcomes of recent unit labour cost developments in south africa although it is apparent that the 2002 inflation target might not be attained. the findings of the most recent survey of inflationary expectations reflect the changed expectations of respondents. the indexation of wages in a number of important pay settlements also raises concerns about the eventual second - round effects of recent large price increases and the bank will, as always, vigilantly monitor the situation in the months ahead. i emphasised in a recent speech that interest rate decisions by the mpc are conditioned by prevailing demand pressures, currency and labour cost movements and other indicators of inflationary conditions. in view of the relatively long transmission lags between interest rate changes and inflation, it is important that corrective measures are timeous and measured without seriously jeopardising the economy's growth performance. flexible inflation targeting implies that the bank should avoid severe corrective action to bring inflation in 2003 or any of the subsequent years to within the target range at significant cost to the real economy. at the same time, however, the bank must ensure that any