lesetja kganyago : south africa ’ s financial stability review – key issues in september 2012 introductory remarks by mr lesetja kganyago, deputy governor of the south african reserve bank, at the launch of the september 2012 financial stability review, pretoria, 24 october 2012. * 1. * * welcome and introduction members of the press, guests, colleagues, ladies and gentlemen. welcome to the release of the september 2012 edition of the financial stability review. the financial stability review has been published semi - annually since 2004 to promote a stable financial system. in addition to its primary objective of price stability, the bank has a mandate to oversee and maintain financial stability. in pursuit of this mandate and to contain systemic risk, the bank continually assesses the stability and efficiency of the key components of the financial system and formulates and reviews policies for intervention and crisis resolution. through the publication of the financial stability review the bank endeavours to communicate its assessment of potential risks to financial system stability and the mitigation thereof. the bank also hopes to enhance the understanding of, and encourage informed debate on these complex and challenging matters related to financial stability. 2. key issues from the september 2012 financial stability review 2. 1 international macro - financial developments since the publication of the march 2012 financial stability review global economic growth has remained weak and the volatility in global financial markets persisted. the negative prospects for economic growth in advanced economies are not only affecting emerging - market economies in various ways, but are also posing serious threats to global financial stability. downside risks to growth such as elevated levels of unemployment, continued uncertainty for a lasting solution in the euro area, and the threatening fiscal cliff in the united states present serious challenges to financial systems globally. the programmes of increased liquidity provisioning by central banks in the united states, europe, japan and the united kingdom would hopefully mitigate these threats. although emerging market economies remain important drivers of global economic growth, concerns about the structural nature of the economic slowdown in china have led to fears that the slowdown may be protracted and may have significant economic and financial implications for other emerging market economies in particular. the volatility in capital flows to emerging economies has also increased as global uncertainty causes regular changes in the risk appetite of investors. bis central bankers ’ speeches impediments to global economic growth are also challenging the resilience of economic growth in sub - saharan africa. 2. 2 domestic macro - financial developments the uncertain and subdued global economic environment also

time castigated for not following a policy that will provide more money at lower interest rates for the purpose of financing the social upliftment programmes of the country. 2. the main objective of monetary policy the mandate from parliament to the reserve bank is not explicit on what “ protection of the value of the currency ” really means. this obviously opens up the way for malignant attacks on the bank, whatever objectives might be pursued. the main objective of the bank, however, is to bring inflation down. over the twenty years from 1972 until 1992, inflation in south africa fluctuated between 10 and 20 per cent per annum, with an average of about 15 per cent. this was obviously too high, and there was general public support for determined efforts by the bank since 1990 to reduce inflation to a single digit level. since 1992, the rate of inflation has been contained within the single digit level, fluctuating between 5 and 10 per cent. over the twelve months up to march 1998, the consumer price inflation equalled 5. 4 per cent, and at the production level, prices rose on average by 2. 3 per cent. in the absence of a formal quantified guideline from the government, the reserve bank defined its goal for inflation as a rate that will be more or less in line with the average rate of inflation in the economies of south africa ’ s major trading partners and competitors. in the present world environment, this will require a rate of inflation of even lower than 5 per cent. the reserve bank is often criticised for being obsessed with inflation, and for unnecessarily depressing the domestic economy, in its efforts to reduce inflation. studies like those recently produced by michael sarel, an economist at the international monetary fund, are thrown against the bank. 3. the monetary policy model of the reserve bank in 1986, south africa introduced the m3 money supply as an anchor for monetary policy. annual targets, or guidelines, for an acceptable rate of growth in m3 were announced by the bank, and decisions to influence overall liquidity in the banking sector, or to change the bank rate, were triggered by substantial deviations in actual money supply growth from the predetermined guidelines. to control the money supply, the reserve bank obviously had to manage the amount of liquidity available within the banking sector, and had to accept realistic interest rates. with fairly stable relationships between the money supply and aggregate demand, the model served south africa well for a relatively long period of time