have flexible markets that will emit understandable signals to all the participants in the economy, including the monetary policy authorities. or even better, to have markets that can be trusted to determine prices with a minimum of government intervention. 5. prospects for the south african economy now that the consolidation process in the south african economy has been achieved with some success, the basis has been laid for a new phase of steady and, hopefully, more sustainable growth. in the sphere of real economic activity, some scope has been created for higher growth in both production and expenditure. it will, of course, be good for future development if any increase in expenditure at this juncture could be concentrated in fixed investment rather than in private sector or government consumption expenditure. the south african balance of payments remains vulnerable and dependent upon a sustained inflow of capital from the rest of the world. we must continue to nurture the confidence of all potential foreign investors, and particularly of the long - term investors who are prepared to participate directly in real economic activity. without foreign capital inflows, any recovery in domestic economic activity will be short - lived. finally, the short - term consolidation process in the financial sector has not yet reached its final and acceptable destination. international financial markets observe the still relatively high rates of expansion in bank credit extension and in the money supply, the above average - rate of inflation, and the growing indebtedness of particular private individuals with circumspection. provided we can continue with the process of also improving equilibrium in the financial markets, the prospects are good for a better overall economic performance next year. in the longer term, economic growth at a suitably high level will, however, only become possible once the more fundamental economic reforms envisaged in gear have been implemented. the restoration of business cycle stability in the short - term was an important precondition for a revival of economic development, but it also paves the way for a more determined effort by all of us over the next few years to raise the overall production capacity of the economy on a permanent basis to a higher level.

by the reserve bank increased by r16. 2 billion from 31 december 1996 to r26. 5 billion at the end of september 1997. the improved underlying conditions were also reflected in a decline in interest rates. as the overall money market situation eased and the reserve bank acquiesced in a gradual decline in the money market shortage to an average daily amount of only r4. 5 billion in the first three weeks of october, money market interest rates moved downwards. the rate on three months ’ bankers acceptances gradually declined from 17. 00 per cent at the end of 1996 to 14. 25 per cent last week. the reserve bank endorsed these movements in the underlying financial aggregates by reducing the bank rate from 17 to 16 per cent on 20 october 1997. 4. the role of monetary policy in the adjustment process as the globalisation process progresses, financial markets, and particularly those of the smaller economies, lose some of their independence. in these countries, the task of central banks becomes more difficult. they can no longer follow an independent monetary policy that will please politicians or internal pressure groups, but must learn to understand to respect and to respond to international market pressures. in most of the countries referred to above, international economic disciplines were transmitted to domestic economies through financial markets. adjustments in exchange rates, interest rates and financial asset prices provided the main transmission mechanism used by the markets to force the disciplines of the international markets on central banks and governments. as with the east asian countries, excessive increases in bank credit extension and in the money supply, and unrealistic interest and exchange rates, or unacceptable fiscal deficits, were severely punished. south africa will have to learn to live with, and to adapt to, these market disciplines. this country can not on a permanent basis maintain lower interest rates than those ruling in most of the other emerging markets. our inflation rate will have to be reduced to come more in line with the average rate of inflation in the economies of our major trading partners and international competitors. there is no magic formula to determine what the level of the exchange rate or interest rates should be on any particular day in south africa. the world financial markets are too volatile, changes too erratic and unpredictable, and economic models based on past experiences unreliable. against this background, monetary policy decisions must of necessity often be based more on discretion, and less on pre - established rules. this makes short - term forecasting of financial developments even more difficult, if not impossible. in this environment, it is important to