mr. stals comments on the need for greater financial flexibility in a volatile global financial environment address by the governor of the south african reserve bank, dr. chris stals, at the annual dinner of the institute of bankers in cape town on 5 / 11 / 98. 1. increasing volatility in financial markets developments in the global financial markets over the past year focused the attention on the ability of countries to adapt to rapidly changing conditions in an extremely volatile global environment. with a strong trend towards globalisation and the worldwide integration of financial markets that swept through the world economy over the past decade, most countries of the world, big and small, have now become more exposed to volatile capital inflows and outflows. the cross - border ( and therefore cross - currency ) transfers of huge amounts of investment funds disrupt domestic and foreign currency markets in many countries almost on a regular basis. from the experience of the past year, it is clear that many of the smaller countries with rapidly expanding domestic economies and emerging financial markets find it increasingly more difficult to maintain domestic financial stability and remain within the unstable environment of an integrated global financial market. the amounts involved in volatile capital transfers are too large for the smaller economies to absorb. countries find it difficult to adapt internal situations to sudden and unpredictable turnarounds in the flow of funds that may take place from time to time. a second major problem that surfaced during this year of financial turmoil centred around the diverse economic needs of many countries that find themselves at different stages of economic development, different phases of the business cycle, and pursuing different objectives with their overall economic strategies. the integrated global financial markets set high standards, based on the needs and norms of the more developed economies, being the main source of the supply of funds. ambitious fund managers, seeking to maximise the yield on investments managed on behalf of demanding clients, have little loyalty to the needs or the circumstances of the countries where they make their investments. there is, indeed, little diversification in their thinking or in their computer programs when they invest in the global markets - - all emerging markets are, for example, treated as just one group of countries. given the environment of volatile capital movements, a third deficiency of the present system has been identified, and that is the lack of a global “ lender of last resort ” or “ discount window facility ” that can serve to provide temporary assistance in times of sudden outflows of capital from a country. the resources of the international monetary fund turned out to

##butable to infrastructure and investment programmes, these are likely to generate a positive rate of return for the south african economy in the medium to long term. conclusion the list of challenges i have focused on is not exhaustive. nonetheless, from this brief and selective review, it is apparent that south africa ’ s economic policy environment, like that of many other emerging markets, will be challenging. clearly, south africa ’ s immediate priority is to strengthen the growth momentum. unfortunately, the role of monetary policy is limited in this regard as monetary policy cannot address structural deficiencies in the economy and influence long - term growth. while monetary policy should and will play its role within the confines of its mandate, a concerted effort is needed by all role players in agreeing and then effectively coordinating and implementing the necessary structural reforms, including addressing the electricity challenges facing the country. this requires a strong, constructive, and thus effective partnership between government, business, labour and civil society organisations. the mpc is of the view that inflation risks are skewed to the upside. having indicated previously that, while not on a pre - set course and being data - dependent, interest rates will have to normalise over time, earlier this year we felt that short - term dynamics allowed for a pause on the interest rate normalisation path. there is now reduced flexibility in this regard bis central bankers ’ speeches and the recent deterioration in the inflation outlook will require the mpc to carefully assess when it will be appropriate to adjust the policy rate further. the forecast horizon is fraught with uncertainties, which calls for heightened vigilance, decisive policy action, and clear communication. it requires us to sharpen our analytical tools to better understand, and strengthen our capacity for forecasting, policy analysis and implementation. thank you. bis central bankers ’ speeches