the foreign exchange and in the money markets, but mainly with the intention of supporting an orderly adjustment in market prices. it - 3was never the intention to try and fix the exchange rate of the rand at any predetermined artificial level, neither did the bank try to keep interest rates unrealistically low. it was furthermore accepted that, after the relatively large depreciation in the exchange rate and taking account also of the “ openness ” of the south african economy, the rate of inflation would rise. the challenge for monetary policy was, however, to constrain the rate of increase in inflation to a first round effect only, and to prevent prices from going into an uncontrollable and perpetuating inflationary spiral. in retrospect, the policy seemed to have worked quite well. the restrictive monetary policy, and particularly the rise in interest rates, were not received with unanimous support by all sectors of the south african community. interest rates, however, remain one of the main disciplines of the market economy and countries that are not prepared to bear the effects of this discipline from time to time will be punished by the markets. this basic lesson is now being learned again by a number of countries in the east asia region where interest rates recently soared to a much higher level than ever experienced by south africa. now that the overall macroeconomic consolidation process has made good progress, there are some impatient pressures building up on the reserve bank to relax monetary policy quickly and decisively. some of these pressures are still based on the now defunct phillips curve or an assumed trade - off between inflation and growth - - an argument that was buried in most countries of the world already in the 1980s when macroeconomic policy switched the emphasis from a demand - management approach to a supply - side solution. the rapid expansion of communications and the increase in electronically driven capacity for economic analyses further contributed to the more effective implementation of pre - empting expectations, and reduced the opportunity for central bankers to stimulate economies in the short term by applying over - expansionary monetary policies. the south african reserve bank now follows the lead of many other central banks in the world to base monetary policy decisions on developments in financial or monetary aggregates, and not on changes in real economic activity. indeed, the latest fashion is for central banks, together with governments, to target inflation more directly. taking account of typical time - lags that exist between the implementation of monetary policies and their eventual effect on prices, monetary policy adjustments are

olli rehn : eternal challenges in monetary policy speech by mr olli rehn, governor of the bank of finland, at the 2023 bank of japan and institute for monetary and economic studies ( boj - imes ) conference, hosted by the institute for monetary and economic studies, tokyo, 1 june 2023. * * * accompanying presentation of the speech thank you, athanasios, and my sincere thanks to governor kuroda for the invitation. this conference, now under the firm leadership of governor ueda, continues to be a key event after 40 successful years. let me make two points on what i would call, neither old nor new, but perennial, eternal challenges in monetary policy. i will start with inflation expectations, and then discuss our monetary policy stance. the heavy cost of a de - anchoring of inflation expectations is one of the most agreed upon issues in central banking. after all, steering inflation towards our targets is largely about steering inflation expectations. slide 1 in the euro area, the inflation outlook continues to be too high for too long. although most measures of longer term inflation expectations currently stand at around our 2 % target, some indicators have edged up and warrant continued monitoring. a lasting rise in inflation expectations is an upside risk to inflation, also over the medium term. persistently high inflation rates are risky, particularly since they could make inflation expectations adaptive. this would be a dangerous development and must be decisively avoided. thanks to the increased extraction of information from micro data, we are now learning more about the formation of inflation expectations. professor weber, who is no stranger to the bank of finland, has shown us that we should analyse inflation expectations more deeply to gain a more profound understanding. this said, when going from the macro to the micro level, the issues tend to become more complex. this goes for survey data, as well, in that we also need a fuller psychological interpretation of expectation formation to better understand survey behaviour. my second point is on the policy stance in the current context. for central banks, there are substantial common global denominators. so, i found it particularly interesting when, yesterday, professor obstfeld drew our attention to the importance of global factors in determining real rates. in his recent work, professor obstfeld has also pointed to a risk that central banks may collectively go too far, as their restrictive policies would reinforce each other. 1 / 2 bis - central bankers'speeches it is fair to note that the