IntroductionAt the beginning of my second term as Governor of the South African Reserve Bank (the Bank) I am pleased and grateful to report that most of the objectives set out in my first Governor’s Address on 24 August 1999 have been achieved over the past five years. With the exception of a short period during 2002 and 2003 when exogenous factors led to an acceleration in price increases, inflation has been restricted to generally acceptable levels and inflation expectations have tended downwards. An inflation-targeting monetary policy framework with a well-organised decision-making process has been implemented. The transparency of monetary policy formulation has been improved considerably. Sound banking supervision in accordance with international best practice has been applied. On top of this, the internal administration of the Bank has been streamlined.The Bank was again successful on many fronts during the past year. By far the most significant accomplishment was the decline in the rate of inflation to within the target range of 3 to 6 per cent as specified by government. From September 2003 the twelvemonth rate of increase in the consumer price index for metropolitan and other urban areas excluding mortgage interest cost (the CPIX) has remained in the target range. Monetary policy was assisted by a number of factors in bringing inflation down, such as fiscal discipline, the recovery in the exchange value of the rand and slower rates of increase in food prices. What made this achievement even more remarkable was that it was accompanied by the longest upward phase of the domestic business cycle ever recorded.Considerable progress was also made in dealing with the management of the international liquidity position of the Bank, which for a long time had been regarded as a negative factor in the assessment of the country by international rating agencies and investors. The negative net open foreign-currency position was finally expunged in May 2003 and the oversold forward book of the Bank was closed out during February 2004. With the accomplishment of these goals, the focus of the Bank shifted to gradually increasing the gross and net official international reserves.