tt mboweni : inflation, growth and employment opportunities lecture by mr tt mboweni, governor of the south african reserve bank, at the department of economics, university of stellenbosch, stellenbosch, 6 march 2003. * 1. * * introduction members of the portfolio professors, staff, students, ladies and gentlemen and select committees on finance, deputy vice - chancellor, it is very pleasant to be on this side of the beautiful hex river mountains and to speak to you on a number of issues right at the core of central banking. the accusation is often heard that central bankers have narrowed the world down to inflation, and do not have an open mind on any other matters. not true! the way in which these matters come together - the principles behind their interaction - will be central to my talk to you today. 2. the magnitude of the challenges facing our economy starting with a longer - term picture of inflation, it is a well - known fact that the double - digit inflation which reigned from 1974 to 1992 left considerable scars on our economy. its redistributive impact was nasty, with the buying power of the most vulnerable groups in society, the poor and the elderly, in particular being undermined. the plight of a pensioner who retired twenty years ago using interest on a fixed deposit to provide for himself or herself is illustrated by the cost of a basket of consumer items which cost r100 in early 1983. the cost of that basket shot up to r380 in early 1993, and currently amounts to r815. although inflation has receded to single - digit levels and has averaged around 7, 8 per cent per annum over the last ten years, this is still enough to very significantly erode the living standard of the most vulnerable groups in our society over time. some distortions therefore remain, leading to frictions and misallocation of resources. high unemployment continues to characterise the south african labour market. based on the responses of a representative sample of 30 000 households sampled in the february 2002 labour force survey, statistics south africa puts the official unemployment rate at 29, 4 per cent. the absolute number of the unemployed amounts to 4, 7 million people. and these are people who are looking for jobs - it does not cover those who have given up. the opportunity cost to our economy is huge : even if each of them would only produce goods and services to the amount of r650 per month ( the equivalent of the minimum wage in

a large degree the negative impulse from global factors. indeed, the unfolding of our monetary policy measures will ensure that financial conditions will remain very favourable, shielding the economy against the external headwinds and laying out the conditions for the build - up of domestic price pressures. at the same time, we are attentive to the possible side effects of the present monetary policy measures. these need to be carefully and continuously monitored. the ecb strategy review in january, the governing council decided to launch a review of the ecb ’ s monetary policy strategy. after more than 16 years, it was time to conduct a thorough review taking stocks of the profound structural changes that have intervened since the 2003 strategy exercise, and reflecting on what these changes and new trends mean for our framework. this process is expected to last one year and it will be conducted by the eurosystem and the ecb staff. we will also reach out to academics, members of parliament – including the european parliament – representatives from the civil society and business, and seek the opinion of financial market participants on selected issues. the scope of the strategic review will be comprehensive. that means that we will look at the quantitative formulation of price stability, together with the approaches and instruments by which price stability is achieved. we will also reflect on how other considerations, such as financial stability, employment and environmental sustainability, can be relevant in pursuing the ecb ’ s mandate. we will conduct a review of the effectiveness and the potential side effects of the monetary policy toolkit developed over the past decade. finally, the review will include an examination of directions in which the economic and monetary analyses through which the ecb assesses the risks to price stability could be enhanced, as well as an evaluation of our communication practices. our strategy review will have a long - term perspective, with the aim to build an efficient and lasting framework. it will not interfere with our meeting - by - meeting policy agenda, in which we will continue to set policy as appropriate given the evolving outlook. our reaction function is clear and entirely data - driven. as we said after our last monetary policy deliberations, “ the governing council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry ”. 3 / 3 bis central bankers'speeches