represented the lowest annual average rate of inflation in south africa for the past 24 years. ominous signs developed over the past two years, however, with the rate of increase in bank credit extension escalating again to 18. 7 per cent in june 1996. the rate of increase in the m3 money supply also rose to 16 per cent in october 1996, while inflation gradually crept up from a low of 5. 5 per cent over the twelve months up to april 1996, to 9. 4 per cent over the twelve months up to december 1996. the current stimulus for inflation emanated mainly from the depreciation of the rand last year, but there is a danger that, if not checked at this stage, it could easily be converted into a new cycle of a continuous rise in the rate of inflation. the reserve bank was therefore forced once again during the past year to pursue a more restrictive monetary policy that led to an increase of approximately 3 percentage points in the level of interest rates. towards the end of 1996, the more restrictive policies began to produce results when both the rates of increase in bank credit extension and in the money supply slowed down. over the twelve months up to december 1996, bank credit extension to the private sector rose by 15. 7 per cent, and the m3 money supply by 13. 7 per cent, both marginally down from the peaks established earlier in the year. inflation is, however, still creeping upwards and it will take some time before the full effect of the depreciation of the rand will work itself out. in the meantime, it is of great importance that all other inflationary impulses in the economy, such as excessive rises in government expenditure or real wage rises in excess of productivity increases, and of course, a continuation of the excessive rates of increase in the monetary aggregates, must be avoided. the depreciation of the rand can bring many benefits for economic growth and development, provided the advantages for international competitiveness will not be dissipated very quickly by rising costs of production and a rising rate of inflation in the domestic economy. the year 1997 is indeed a testing period for the reserve bank and for the monetary policy applied by the bank. should the bank fail in its efforts to protect the value of the currency at this stage, the goals set by government for economic reconstruction and development, and the implementation of the government ’ s strategy for growth, employment and redistribution will not be attainable.

be over - restrictive - - an approach that is necessary in order to neutralise the inflationary effects of many non - monetary actions that are exerting upward pressure on prices all the time. 4. the monetary policy model of the reserve bank most central banks in the world pursue the same prime objective of protecting the value of their currencies. not all central banks, however, follow the same model in the implementation of monetary policy. the reserve bank ’ s policy is a “ monetarist ” approach based on the direct control of the money supply. controlling the money supply is seen as an intermediate objective in reaching the ultimate objective of controlling inflation. some countries target inflation directly in the monetary policy model. taking account of the many causes of inflation, direct targeting of inflation requires broad co - ordination of macroeconomic policies such as fiscal policy, trade and industrial policies, labour policies, and international economic relations policies. it should indeed be based on a broad accord of a consistent macroeconomic policy framework that will support the need for keeping inflation down. low inflation is no guarantee for higher economic growth and development, but it is an important precondition for attaining better standards of living for all the people of the country on a sustainable basis. in some other countries, monetary policy is anchored to a fixed or stable exchange rate formula, instead of to the money supply. this is perhaps good for countries with a relatively open economy ( such as south africa is now becoming ). it is a precondition for the successful implementation of this type of model that the country will be able to stabilise the exchange rate through regular intervention in the foreign exchange market. to begin with, the central bank must have access to a substantial amount of foreign reserves to enable it to intervene in the market for foreign exchange in a meaningful way. the south african model for monetary policy is, however, based on controlling the money supply. within the family of monetarists, there will always be differences of opinion on what the most appropriate definition is for the money supply, on how this money supply should best be controlled, on when and how actions by the central bank must be triggered, etcetera. the basic objective remains, however, to keep the rate of increase in the money supply within reasonable limits. the reserve bank ’ s policy is seen to be rather accommodative and does not comply with the strict money rule of not tolerating any inflation. guidelines for an acceptable rate of increase in the m3