cpi inflation has been inside the target range since february 2010, with the outlook being generally favourable, although developments around wage settlements and administered price increases continue to pose upside risks. the low interest rate environment prevailing in advanced economies has resulted in a consistent search for yield, and as a consequence, south africa, like other emerging markets, has attracted significant capital inflows. since the beginning of the year, nonresidents have purchased over r75 billion worth of domestic bonds and equities. the rand exchange rate has been somewhat volatile and in the past two months the rand / dollar exchange rate fluctuated between r8. 10 and r7. 18. after declining from 45 per cent in october 2008 to 13 per cent in april 2010, historical volatility of the rand increased briefly to 18 per cent in may 2010, but has since eased from these levels. much of the underlying volatility can be ascribed to changes in global risk aversion related to events in europe in particular, with significant volatility experienced in the usd / eur exchange rate. however, it is worth pointing out that the volatility in the exchange rate of the rand has been in line with the volatility observed in respect of currencies of other emerging market and developed countries. it is generally accepted that currency volatility and excessive appreciation unrelated to economic fundamentals can have an undesirable effect on the domestic economy, through adverse impacts on both the export and import - oriented sectors. while the bank is cognisant that an over - valued exchange rate over an extended period can be very costly to the economy, it also needs to be recognised that the open nature of our economy makes us more susceptible to all kinds of spillovers from the global economy and financial markets, making any attempts to seek to control the exchange rate at a particular level not feasible. not having or not seeking any particular target for the exchange rate, however, does not imply that reasonable and responsible steps cannot be taken to manage abrupt adjustments. as we have said on numerous occasions, any actions would have to be consistent with the inflation target. while the rand exchange rate is a critical variable, we need to take a more holistic view to ensure that the overall policy mix is designed and implemented in such a way that policies are complementary in order to raise economy - wide productivity, growth and employment while keeping inflation in check. 5. new challenges for central banks? over the past two decades, central banks in advanced

’ s “ manias, panics and crashes ” 12 but one would be hard pressed to predict from reading such “ classics ” the importance of novations of a derivative trade or additional collateral calls from a clearing bank to an investment bank for its tri - party book. yet these were just the kinds of detailed market developments, often associated with the plumbing of financial systems that economists at the new york fed were hearing at the afternoon meetings from new york fed staff interacting with market participants in real time as the crisis progressed. however, since financial crises are almost impossible to fit into the standard framework of efficient markets, it was only after the near failure of bear stearns that we as economists were more able to piece a more accurate story together. one can find a clear and comprehensive description of these issues in darrell duffie ’ s book, “ how big banks fail. ” 13 see tobias adrian, paolo colla, and hyun song shin ( 2011 ), “ which financial frictions? parsing the evidence from the financial crisis of 2007 – 09 ” federal reserve bank of new york staff reports no. 528 ( new york : federal reserve bank of new york, december ). for example, see alp simsek ( forthcoming ), “ belief disagreements and collateral constraints ” econometrica. for example, see fischer black ( 1986 ), “ noise ” journal of finance, vol. 41 ( july ), pp. 529 – 543. charles p. kindleberger ( 1978 ), manias, panics, and crashes : a history of financial crises, ( new york : basic books, inc. ). darrel duffie ( 2010 ), how big banks fail and what to do about it, ( princeton : princeton university press ). bis central bankers ’ speeches my experiences as a central banker directly observing and trying to think of ways to counteract the panic that took hold of global financial markets in september 2008 also underscore that published statistics and market prices may at best tell part of the story of developments in financial markets and how they might be affecting the economy as a whole. these experiences highlight the need of policymakers for real time market intelligence and having staffs with operational experience and a solid grasp of market functioning to develop appropriate policy responses. 14 recall that in just over four weeks following the failure of lehman brothers the global financial system experienced a panic of unprecedented speed and destructive power. observing the panic up close was a sobering lesson about how quickly a complex financial