in bringing their inflation rates down to low levels have left south africa with no other alternative than to bring our inflation in step with that of the rest of the world and to keep it there. if this is not achieved in the coming years, market adjustments will take place to compensate for the inflation differential. such adjustments could include large disruptive capital outflows, a depreciation in the external value of the rand and high interest rates. the thrust of monetary policy in the new globalised financial environment must therefore be the pursuance of price stability. fortunately the reserve bank has already chosen to follow this course and success in bringing inflation down is within our grasp. unfortunately such a policy stance does not provide unconditional protection against speculative capital outflows. the decisions of international investors are based on international interest rates, exchange rates and such factors as political stability. these factors are beyond the control of the central bank. the only approach that the reserve bank can follow is to do its important bit for stability, growth and employment creation, and that means establishing and maintaining financial stability. however, the way in which this objective is pursued, is in the hands of the reserve bank. recently an inflation - targeting monetary policy framework was adopted for this purpose. inflation targeting has been used in many other countries with great success. with the adoption of this approach to monetary policy in south africa, the authorities attempted to create greater certainty about what monetary policy wants to achieve. no one is left in the dark any longer. everyone should know by now that the reserve bank ’ s ultimate objective is an annual average inflation target range of 3 to 6 % for the year 2002. this new framework has helped to focus monetary policy, has promoted transparency and has led to a clearer public accountability of the reserve bank. globalisation and increased international competition have made it important for the reserve bank to adopt inflation targeting as its policy approach. international capital flows and liberalised financial markets obscure the relationship between money supply, interest rates and inflation. in an integrated world economy the money supply becomes a less reliable anchor for monetary policy, forcing the authorities to take a different approach. a fixed exchange rate system would also be a difficult monetary policy framework to pursue in a world experiencing large and volatile capital movements. this was clear from the developments in mexico during the tequila crisis and in thailand, malaysia and indonesia during 1998 when large amounts of capital were withdrawn from emerging - market economies. however, some countries, such as hong kong and argentina, have applied a

sector soundness. adherence to these international best practices and codes should help to ensure that economies function properly. the third area is the strengthening of the financial sector. the assumption is that banks and other financial institutions need to improve internal practices, including risk assessment and risk management. at the same time the official sector needs to upgrade the supervision and regulation of the financial sector to keep pace with the modern global economy. to achieve these objectives, the basel committee has developed the core principles for effective banking supervision, while the committee on payments and settlement systems has drawn up the core principles for systemically important payment systems. universal principles for insurance as well as security market regulation have also been developed. the fourth area of financial sector reform concerns involving the private sector in crisis prevention. the involvement of the private sector should limit moral hazard, strengthen market discipline and improve the repayment of loans. the fifth area of reform concentrates on the prevention of systemic instability. most of the international best practices and codes have been established to minimise the effects that the insolvency of a financial institution may have on other institutions. in addition, the imf has created a contingent credit line facility as a precautionary defence for countries with strong economic policies. this facility has been designed to prevent the balance of payments problems that could arise from international financial contagion. south africa has been actively involved in discussions on the new international financial architecture. we recently also participated in a financial system stability assessment undertaken by the imf and the world bank. the report on south africa has not been published, but found that the south african financial system is robust and that the financial sector ’ s legal framework is impressive. the assessment was further that south africa is in broad compliance with recognised best practice in the fields of security, insurance and banking regulation and that we are making substantial efforts to ensure transparency. despite this favourable assessment, we must nevertheless continue to strive for sufficiently accountable, transparent and effective cooperation between the various agencies for the smooth running of south africa ’ s financial markets. this should instil public confidence in the financial system. the banks act and the regulations governing the activities of the banks have been amended to bring them into line with international developments. in addition, the reserve bank has established a financial stability unit ( fsu ) to focus on the overall stability of the financial sector and its preparedness for global competition. one of the functions of the fsu is to keep abreast of international developments as far as stability issues are concerned