other producers ( e. g. gold mines ) competitive. depreciation in itself can lead to more inflation and a vicious circle of more - inflation - more - depreciation can easily get out of control and destroy the whole economy. inflation is inclined to feed on itself. it is almost impossible to keep a little bit of inflation always just a little bit. as long as there is inflation in the economy, monetary authorities must remain on their guard. even if relatively low inflation can be tolerated, there is always a danger that the rate of price rises will increase. because of all these adverse characteristics of inflation, this illness of the market economy often leads to serious social disruption which brings with it political instability. it is therefore in the interest of the economy, the social structure and the political system that a government and its people shall always be prepared and ready to fight inflation. 3. the causes of inflation inflation is a rather complex phenomenon of the economy. there is no single cause of inflation. it can find its origin in the rest of the world, and can therefore be imported from abroad. it can be caused by excess demand, that is, by a desire of an economy to absorb more goods and services than it can afford to supply ( from domestic production plus imports ). the excessive demand can emanate from government expenditure, private sector consumption expenditure, or even fixed investment. it can be caused by wage increases in excess of productivity rises that will lead to an increase in the labour cost per unit of production. it can be generated by monopolistic practices that can be misused to generate surplus profits for entrepreneurs. whatever the basic causes of inflation might be, it is normally accompanied or accommodated by excessive increases in the money supply. indeed, inflation may often find its origin in excessive increases in the money supply when monetary policy is used as a deliberate instrument to provide artificial stimulation to the economy. in any national programme to keep inflation down, the control of the money supply must be included as an indispensable component of the total package. restricting the growth in the money supply will make it impossible for inflationary impulses, even of a non - monetary origin, to escalate and permeate in continuous price rises. in the south african economy, there are many inflationary forces at work at all times. the task of the south african reserve bank is therefore not an easy one. because of these many inflationary forces, the bank must apply a policy that at times seems to

several years, at least judging by the level of real short - term interest rates, which remains unusually low. furthermore, the impact of such accommodation has not been felt as much as previous cycles would have suggested. in addition to the absence of demand pressures, the relatively subdued growth in money and credit extension, and the lack of significant gains in property prices over the past few years, suggest a lack of appetite among private agents for new borrowing. most probably, the elevated degree of households ’ leveraging at the time of the recession has acted as a constraint on their willingness and ability to respond to the sharp decline in interest rates. it is also noticeable that non - resident capital inflows into south africa have not, in recent years, fed into the kind of fast domestic credit expansion that one saw in several asian or latin american economies. the south african reserve bank ’ s policy response i have already emphasised that the sarb does not target the exchange rate. amid weaker economic growth, and with the currency depreciating for many reasons, several of which are independent of our domestic environment, raising interest rates aggressively in an attempt to prevent currency depreciation could quickly become a futile, if not counter - productive approach. the imf recently highlighted in its latest issue of the world economic outlook that bis central bankers ’ speeches currency depreciation can play a welcome role as an absorber of shocks, including terms of trade shocks. this is the case, of course, as long as the depreciation does not spill over into lasting and more broad - based price pressures, or threaten the stability of a country ’ s financial system. the risk of price pressures is where the main focus lies for the sarb. admittedly, financial stability is also an integral part of our mandate and focus. but at present, the latest rand depreciation does not pose immediate threats to financial stability. due to prudent financial management by both the public and private sectors, south africa ’ s foreign currencydenominated external debt represented less than 20 per cent of gdp as of the second quarter of 2015, even though it has risen in recent years. 4 it is true that foreign debt issuance by south africa ’ s corporate sector has increased quite significantly in recent years. however, it has not reached the levels seen in some other emerging countries, particularly in asia. furthermore, the banking sector ’ s foreign assets and liabilities remain relatively low, at 14 and 10 per cent of the banks ’ total