growth rate in money supply. commitment to an intermediate target would be inconsistent with inflation targeting except if it is the only determining factor of inflation. obviously this is unlikely. although growth in money supply is a precondition for a general rise in prices, it is not the only factor that causes inflation. in an inflation targeting framework the central bank has to adopt a strategy of determining directly what the likely path of inflation will be. in inflation targeting close attention is typically given to changes in indicators which in the past have affected inflation. this has led to sophisticated models for the prediction of inflation and detailed assessments of factors that could affect it. the prediction of inflation is of the utmost importance in the implementation of monetary policy because changes in policy measures are based on likely future price developments. the fact that inflation targeting has to rely on forecasting has led to the criticism that this is a weakness of the technique because forecasts are inherently unreliable. although it is true that an inflation targeting framework is based on forecasts, it is also true that any other monetary policy framework has to take account of the fact that policy changes will only affect inflation some time in the future. if the objective of the central bank is the attainment of financial stability, it will always have to take a view on how its current policy stance will effect future price developments, whatever monetary policy framework it decides to pursue. the difference between inflation targeting and other monetary policy frameworks is that inflation targeting makes forecasting explicit and transparent. the adoption of inflation targeting by a central bank does not mean that the central bank must apply definite rules and is not left with any discretion. exclusive emphasis on inflation goals over the short - term could lead to a highly unstable real economy in the case of serious supply shocks. if a severe supply shock hits the economy, keeping inflation close to the long - run target could be very costly in terms of lost output. in such cases, some discretion must be applied. many of the central banks opt for escape clauses in these circumstances. others have defined the inflation target in such a way that changes in food prices, the price of oil or the effects of value added tax are excluded from the index that they target. the degree to which the central bank is held formally accountable for inflation outcomes varies considerably. in new zealand the tenure of the governor of the central bank is linked directly to the achievement of the inflation targets. in most other countries there are no explicit sanctions on central banks if they miss the target. however, missing the target

mr. stals discusses the current economic situation and factors influencing monetary policy in south africa in 1999 address by the governor of the south african reserve bank, dr. c. stals, at an international conference arranged by abn amro bank and kagiso financial services, held in johannesburg, on 3 / 11 / 98. 1. domestic economy dominated by international developments during the past six months the south african economic scene was dominated by developments in the international financial markets. the east asian financial market crisis, which already started with pressures in thailand ’ s foreign exchange market in june 1997, took some time before it spread to other emerging markets outside of the east asian region, and also to the smaller industrial countries of the world. more recently, financial markets in major industrial countries also became contaminated. in the case of south africa, the contamination took place through the disinvestment of foreign funds from the south african bond exchange. during the first four months of 1998, non - residents increased their holdings of south african bonds by r16. 3 billion. during the next five months, from may to september 1998, they reduced their holdings of south african bonds by r22. 4 billion. this major switch was directly linked to a reassessment made by foreign investors during april / may 1998 of their investment positions, and the decision to reduce their exposure in fixed - interest bonds of the emerging market economies. it is interesting to note that non - residents continued to increase their investment in south african equities. after increasing their investment in south african shares acquired through the johannesburg stock exchange by r19. 4 billion in the first four months of 1998, they added a further r17. 3 billion during the following five months. the reversal in the investment trend on the bond exchange was, however, sufficient to change drastically the outlook for the south african economy, and some promising economic developments in the first quarter of this year were promptly aborted. 2. adverse financial developments lead the downward trend in the economy the sudden switch of foreign investors ’ sentiments had far - reaching effects in the south african financial markets : • • • the immediate effect of the withdrawal of investment funds from the bond exchange was a sudden and sharp increase in the yield on long - term bonds. the average monthly yield on long - term government bonds rose from 12. 9 per cent in april 1998 to 18. 3 per cent in september. the withdrawal of foreign investments created pressure in the foreign exchange market and the average effective exchange rate of the