Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the "South African Investment Summit" Conference of the International Herald Tribune, Johannesburg. 1. IntroductionInvestor confidence is based on many unquantifiable concepts such as stability, security, credibility, consistency and success. These perceptions apply not only to the economy of a country, but also to the political, social and cultural environment in which the investor has to operate.Monetary policy is but one element of total economic policy, albeit a very important component of the total macro-economic strategy. As such, sound and good monetary policy on its own cannot guarantee new investment, neither by domestic nor by foreign investors. Sound monetary policy is, however, an important precondition for investor confidence.The main objective of the South African monetary policy is to secure overall financial stability. The goal of monetary policy is therefore not an end in itself, but rather an intermediate objective intended to provide a financial environment that will be conducive to the attainment of the ultimate objective of optimum economic growth and development. The best contribution monetary policy can make towards the achievement of this final goal is to provide a stable financial environment. The ultimate measure of overall financial stability is a low (or should it be a zero?) rate of inflation. The task of monetary policy therefore is to protect the value of the currency, and to work against inflation all the time. 2. The South African record of inflationSouth Africa's record on inflation is not that good. For a long period of time, that is from 1974 to 1992, the rate of inflation stayed in the double digit range, with an average annual rate of increase in the consumer price index of about 14 per cent. In both 1993 and 1994, however, the rate of inflation declined to slightly below the level of 10 per cent, with average prices rising by 9,7 per cent in 1993 and by 9 per cent in 1994. Over the twelve months ending in July 1995, average consumer prices again rose by 9 per cent.There is some misplaced complacency now in South Africa that this is good enough. It is argued that, as long as the rate of inflation can be constrained to below 10 per cent, it will be sufficient. This view is partly based on the generally discredited perception of a socalled "trade-off" that is presumed to exist between inflation and growth. It is even believed by some of the proponents of this approach that a little bit of inflation may be good for growth. Empirical results throughout the world refute this belief. There is overwhelming evidence that, over the longer term, countries with low rates of inflation achieve better results with economic growth and development than countries with high inflation. The trade-off theory may have had more validity in the decades of the sixties and early seventies when exchange rates were fixed in terms of the Bretton Woods System, and inter-national capital flows were much smaller. Today, the principle of rational expectations supported by sophisticated forecasting methods based on electronic data processing techniques lead to much quicker reactions in markets, and in market prices.Over the past year, there were some threatening signals that inflation in South Africa was creeping up again into the double digit range. After bottoming out at a level of 7,1 per cent in April 1994, the rate of increase in consumer prices accelerated again to 11 per cent in April 1995. Since then it has, fortunately, receded again to 9 per cent over the twelve months up to July 1995.The battle against inflation has clearly not yet been won. The slightest relaxation in the vigil of monetary policy against this evil leads to quick revival, and to the resurfacing of the many underlying inflationary pressures still present in the system. This was proven over the past eighteen months when some lax monetary policies allowed the rates of increase in the amount of bank credit extension and in the money supply to accelerate again to an unten