Introduction The South African economy has recovered remarkably from the contagion effect of the financial turbulence in Asia and Russia. After being seriously affected by the volatility in global financial markets during the four months from May to August, tentative signs of a return to financial stability already began to appear during the last few months of 1998. The recovery of the financial sector was, however, attained at the cost of lower economic growth because of the restrictive measures that the authorities were forced to apply, the impact of a slowdown in international economic activity in many parts of the world and a slump in international commodity prices. Currently the economy seems to be poised for higher growth in production, provided that it is not again affected by setbacks in other countries.At the beginning of the financial turmoil the thinking was that it would only have a limited impact on domestic economic conditions through a lower demand for South African exports from the Asian region. Later it became apparent that the crisis would not only be restricted to certain countries in Asia, but would affect many countries around the world. The international financial system was dealt a further blow when Russia de facto devalued the rouble, imposed a moratorium on foreign credit repayments and unilaterally restructured public debt in August 1998.As a result of these circumstances, international investors lost confidence in emerging markets and withdrew investments from developing countries to higher quality, but lower yielding, financial assets of industrialised countries. Interest rates rose to high levels, equity and bond prices fell sharply and the currencies of many economies depreciated considerably. Many banks and other financial institutions suffered losses, especially on highly leveraged investment positions, which induced systemic risks in the financial sectors of some emerging-market economies. The financial turmoil spilled over to real economic activity, with serious consequences for growth in world production and trade.All these developments once again demonstrated that in a globalised financial system the mobility of capital has serious consequences for financial stability. In a closely integrated financial world it has become even more important for monetary policy to be focused primarily on financial stability. The lack of a credible commitment to that objective by the monetary authorities could intensify the risk of market overreaction and systemic instability. Such a policy approach does not, of course, provide unconditional protection against speculative capital outflows. Decisions by international investors to withdraw capital from a country, based on developments in other emerging-market economies, are beyond the control of any central bank. The best approach that the South African Reserve Bank can follow is to pursue financial stability in a transparent way so that it can forestall uncertainties.Monetary policy will be more successful in avoiding imbalances and disruptive capital flows if measures are in place to address structural weaknesses in the economy. Crisis prevention requires close co-ordination between the various spheres of macroeconomic management to ensure market confidence. In addition, domestic financial systems should be closely monitored and made more transparent and thus more robust.While it is essential for South Africa to maintain these disciplines, the recent crisis has illustrated the need to adapt the international financial system to the realities of global markets to reduce the frequency and size of crisis situations. International organisations have made considerable progress with the improvement of the financial architecture. Standards or codes of good practice have been or are being developed in many financial disciplines to allow market participants to compare the practices of countries with internationally agreed benchmarks. The Reserve Bank regards this work as essential for the creation of more stable conditions and is accordingly willing, wherever po