levels that could be described as price stability. in retrospect, two mais lectures seem to have been of particular significance : those by nigel lawson in 1984 and by tony blair, then leader of the opposition, ten years ago this month. despite clear differences of view, what stand out from those two lectures are their similarities. both emphasised the need for a medium - term framework for monetary and fiscal policy. over twenty - five years we have moved from monetary targets to an inflation target and from a medium term financial strategy to rules for fiscal policy over the cycle. yet the essential objective of maintaining monetary and fiscal discipline remains the same. all major political parties in the uk now agree that stability is the key to economic success. we do not know whether the great stability will continue, as it has for more than a decade now. in part, it will depend upon whether our framework of inflation targeting can respond to the economic shocks that will undoubtedly be visited upon us in the years ahead. and that is the subject of my lecture. in only fifteen years inflation targeting has taken the central banking world by storm. table 1 shows that there are now 22 countries in which monetary policy is based on an inflation targeting regime. so tonight i want to discuss what inflation targeting really means, why it has been successful in britain and elsewhere, and what challenges it faces in the years ahead. the lecture tries to answer three questions. first, what can monetary policy do and how has our understanding of that changed over time? second, what are the challenges for central banks that result from incomplete knowledge of the transmission mechanism of monetary policy? third, is inflation targeting the answer to those challenges? i believe that it is. inflation targeting, i shall argue, this proposition is documented in detail by batini and nelson ( 2005 ). see capie and wood ( 2001 ). is the natural way to conduct policy when there is a great deal about its effects that we do not understand. the practice of monetary policy must recognise that monetary theory will continue to evolve. that is why my lecture is subtitled : practice ahead of theory. what can monetary policy do? in practice, monetary policy means setting the level of the official interest rate at which the central bank deals with the banking system. 3 but ideas about how interest rates should be set, and with what objective, have been subject to radical changes since the 1970s. let me give three examples. none is new ; the subject has moved on. i give them to show

- term growth and job creation strategy encapsulated by the national development plan that includes many of these policies. and although structural reforms take time to implement, demonstrable progress with regard to implementation will likely increase business confidence from its current low level and thus also boost the economy in the short term. the south african reserve bank also has a growth - supportive role to play, which i would like to explain. we have two mandates, namely price stability ( as our primary mandate ) and financial stability. financial stability, expressed in a more explicit manner, is a relatively new mandate, in line with international best practice following the global financial crisis. organization for economic cooperation and development. bis central bankers ’ speeches by various measures – including currency liquidity 6, stock market capitalisation 7, and localcurrency bond demand 8 – south africa has exceptionally deep and sophisticated financial markets for a middle - income country. indeed, the country is ranked 12th in the world in terms of financial market development, as measured by the world economic forum. 9 the finance sector has become an increasingly important contributor to growth, rising as a proportion of total real gross value added from 17 per cent in 2000 to 22 per cent in 2015. stability in this sector is thus important to the south african economy as a whole – and also supports a more efficient transmission of monetary policy. fortunately, south africa has an established history of financial stability. in a recent comprehensive study of banking development, south africa was identified as one of only four large countries that granted large amounts of domestic credit and had not experienced any banking sector crises since 1970. 10 this combination of financial stability and relatively adequate credit is rare, and the bank has an important role in safeguarding it. price and financial stability alone cannot create growth. rather, they provide a platform enabling medium - and long - run growth. financial stability means that institutions and markets are well regulated, which ensures adequate capitalisation and prevents excessive risk - taking. as a result, the economy has sufficient access to credit for investment and growth. price stability means that investors are assured of a competitive and predictable inflation environment, leading to greater certainty over future business conditions and therefore lower long - term interest rates. in south africa, we define price stability as meeting our continuous 3 - 6 per cent inflation target. the flexible inflation - targeting framework that we implement relies on anchored inflation expectations, especially among price and wage setters. this framework has led to an improvement in our inflation performance. from 1970 to 2000,