1.Outcome for 1996At the beginning of 1996, the Reserve Bank indicated that an appropriate rate of increase in the broad money supply (M3) between the fourth quarter of 1995 and the fourth quarter of 1996 would fall within the range of 6 to 10 per cent. These guidelines were regarded to be consistent with the medium and longer term monetary objectives of the Reserve Bank and with the overriding goal of maintaining financial stability in support of sustainable economic growth and development. The realised growth in M3 over this guideline period, however, amounted to R41,2 billion, or 15,2 per cent. The actual month-end values of the broadly defined money supply also exceeded the corresponding projected values of the upper limit of the guideline range throughout 1996. The year 1996 represented the third consecutive year in which the growth in M3 was considerably higher than desirable growth rates as indicated by the Reserve Bank. Owing to the high demand for money, the rate of increase in the broad money supply aggregate averaged 14,7 per cent from the beginning of 1994 up to the end of 1996. If allowance is made for business cycle developments and the two low economic growth years 1992 and 1993 are included in the comparison, the average annual growth in M3 over the past five years comes down to a lower level of 11,6 per cent. Over this longer period the growth in M3 therefore still exceeded the upper limit of 10 per cent of the money supply guidelines, and more or less equalled the growth rate in nominal gross domestic product, which indicates a relatively accommodative monetary policy stance. The transaction motive for holding money, related to large increases in real expenditure and an almost explosive increase in the turnover in financial markets in recent years, was an important contributing factor to the high rates of increase in money supply. Certain structural changes, such as the integration of South Africa in international financial markets and the absorption of more South Africans in the market economy, also caused the growth in money supply to remain high for a longer period than would normally have been the case during the course of the business cycle. In addition, the high growth in money supply during 1995 and 1996, and particularly in the shorter-term components of M3, reflected an enhanced confidence in money as a store of value in view of more favourable yields on deposits. The main statistical counterpart for this growth in money supply was a vigorous rate of increase in credit extension by monetary institutions to the private sector that fluctuated around a level of 17 per cent throughout 1995 and 1996. Credit extension was boosted on the demand side by strong consumer and investor confidence as fears of political instability subsided and economic growth improved. Restructuring in employment policies generally leading to a replacement of older by younger people and also a switching from foreign to domestic financing of international trade transactions arising from the instability in the foreign exchange market in 1996, contributed further to the steady high increase in credit demand. On the supply side, banks actively promoted the use of credit facilities, while retail outlets encouraged consumers to increase their spending by means of in-house credit cards. In view of these developments and in pursuing its mission to protect the value of the rand, the Reserve Bank had no other option but to adopt a more restrictive monetary policy stance. The first Bank rate increase of one percentage point was already made on 26 September 1994, followed by two further increases in 1995 to bring Bank rate to a level of 15 per cent at the end of June 1995. Shorter-term as well as longer-term market interest rates and yields similarly moved up sharply in the first half of 1995, before the rates in the capital market started to contract in the second half of that year. This downward movement in longer-term rates was reversed with the sudden decline in the net inflow of capital from abroad that occurred in the first quart