Address by Dr Chris Stals, Governor of the South African Reserve Bank, at a meeting of the East London Branch of The South African Institute of International Affairs, East London. 1. IntroductionThe importance of reducing inflation in South Africa to a lower level has increased over the past year. With South Africa's reintegration into the world economy, comparisons by potential investors of relative price changes in various countries more or less at the same stage of economic development and competing with each other for scarce funds, have become of greater importance. At the same time, the dedication to a programme of economic reconstruction and development in the country with the intention of improving the living conditions of the lower income groups of the South African population, has focused the attention on the adverse consequences for all South Africans of the continuous erosion in the value of money. For many years, South Africans erroneously believed that inflation at the double-digit level is unavoidable, and that South Africa must ad infinitum live with prices rising at somewhere between 10 and 20 per cent per annum. This fallacy was embedded in the minds of people by a very poor track-record of more than twenty years of double-digit inflation. From 1972 to 1992, the average rate of inflation was indeed about 14 per cent, with annual rates ranging from 11 to 21 per cent over this period. This bubble burst when inflation dipped to below 10 per cent in 1993, when the average rate of inflation for the year came to 9,7 per cent, to be followed by 9,0 per cent in 1994. Indications are that South Africa will have an average rate of inflation of below 10 per cent for the third year in succession in 1995. We may even have succeeded in establishing a new bench-mark for inflation at this lower level. We find increasingly that this lower level is now being accepted as a starting-point for wage negotiations, price adjustments, economic expansion programmes and projections of possible future economic developments.There is a danger, however, that South Africans are again becoming complacent about the current level of inflation. The opportunity we now have to drive inflation to an even lower level can easily be lost again, unless we maintain a continuous vigil against the danger of rekindling inflation. One reason for this misplaced complacency is often based on the argument that we need not be too sensitive about inflation as long as it stays below the level of 10 per cent, because at this low level it will not have any serious adverse effect on economic growth and development. It is sometimes argued that a little bit of inflation may even be good for growth, and may stimulate economic development. This argument is, however, fraught with danger. The biggest problem with this attitude is that a little bit of inflation never stays just a little bit -- inflation, if unchecked, feeds on itself and almost automatically moves to higher levels on a continuous basis. Without caution, it can easily run out of control and eventually destroy the total economy. It is therefore in the interest of our economic objectives for the future that South Africa, and particularly the South African Reserve Bank, shall maintain its vigil against inflation. Indeed, there are good reason for doing our utmost best to bring inflation down to an even lower level than the current rate of about 9 per cent per annum. 2. South Africa's changing international economic relationshipsProbably the most important economic changes in South Africa over the past year have been linked to the changing pattern of the country's international economic relations. These changes can have far-reaching implications for the growth potential of the economy, for the ability to create more jobs and to improve the living conditions of all the people of the country, provided we make the best use of the many newly-created opportunities. Firstly, the harmful international sanctions, boycotts, disinvestment campaigns and the withdrawal of international loan funds from the country wer