indebtedness is justified on the basis of improved household balance sheets, my concern relates to the socio - economic impact of excessive debt accumulation. as more and more people find employment or better paid employment, the temptation is to rush out and buy a bigger car and a bigger house. very soon, we see people becoming overextended and repossessions become commonplace. part of this development is due to excessive exuberance on the part of consumers. there is not a culture of saving in south africa, as demonstrated by our very low savings rate, and people are happy to borrow excessively against future income in order to finance current consumption. the problem has also been compounded on the supply side with banks and others, including retailers, falling over themselves to extend credit, resulting in a number of questionable lending practices. perhaps the situation is not as bad as in other countries such as australia, where it was reported a few months back that a woman successfully applied for a credit card for her cat. but some of the stories we have heard locally are not much better. fortunately some sanity appears to be returning to the market with the recent adoption by the banks of a voluntary code of good conduct with respect to the marketing of credit. at the same time, further constraints on lending have become evident with the introduction of the national credit act in june, when stricter requirements were imposed on lenders to determine the creditworthiness of borrowers. although this may have a dampening affect on certain categories of credit extension and introduce more careful risk assessment, we do not believe that this will replace the need for monetary policy restraint. 6. economic growth and inflation excessively high economic growth brings with it potential inflationary pressures to which monetary policy has to be sensitive. in each of the past three years, the economy has been growing at a rate of 5 per cent, which is high compared to our experience of the past 25 years or so. capacity utilisation in the manufacturing sector has also reached record high levels. while we in the bank are pleased by this strong growth performance, we have to ensure that this growth does not affect inflation adversely. in economic terminology this refers to the concept of potential output, which at a simplified level is the rate at which the economy can grow without generating inflationary pressures. from a monetary policy perspective we have to consider whether our current growth experience is inflationary. in other words, are we growing in excess of our potential output? unfortunately, estimating potential

output is not a simple task and the estimates are subject to a high degree of uncertainty. current research in the bank estimates that the potential output of the economy is now at least around 4, 5 per cent per annum. this can be compared to estimates of around 3 per cent or less during the 1990s. if this estimate is correct, it implies we are currently growing at a rate above potential. this is not necessarily a threat to inflation if this growth entails the necessary microeconomic reforms which will allow for a higher potential growth rate. however if the growth rate does not improve the productive capacity of the economy, there could be inflationary consequences. these considerations are not easily observable, which makes our job that much more difficult. 7. wage settlements in recent weeks, following the publicity emanating from the public servants strike, much attention has been focused on the risk to inflation from higher wage settlements. from an inflation perspective, higher real wage settlements may increase domestic demand pressures. there also may be a cost - push effect as producers pass on the higher wage costs in terms of higher prices. the latest consolidated data for the economy as a whole are not yet available but there does appear to be a worrying trend towards higher nominal wage settlements. however we should also bear in mind that at this stage real wage settlements do not appear to be significantly higher than in the recent past. in other words, higher nominal wage settlements are simply compensating workers for the higher trend in inflation. it is therefore important that we reverse this inflation trend. furthermore, we also need to focus on the increases in unit labour costs, that is, the nominal wage increases adjusted for increases in labour productivity. the latest data indicate that in the first quarter of this year unit labour costs in the non - agricultural sector increased by 2, 2 per cent compared to the first quarter of last year of 2006. so although wage growth poses an increasing threat to the inflation outlook, it does not appear to be out of control. 8. administered prices when we initially adopted the inflation targeting framework, one of the constant laments we had at that time was the challenge posed to us by the range of administered or regulated prices in the economy which remained stubbornly high. administered price setting by the regulators eventually became more market - related, and from around 2003 till recently this category did not feature among the list of our concerns. unfortunately this situation is changing. the administered price index ( excluding petrol ) has been increasing steadily in recent months.