Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the 18th Annual Investment Conference of Frankel Pollak Vinderine Inc, Johannesburg. 1. The objectives of monetary policy The main objective of monetary policy as applied in South Africa in recent years has been to fight inflation. This objective was pursued within the context of the broader concept of overall financial stability. The Reserve Bank has operated within a monetary policy framework anchored to predetermined guidelines for an acceptable rate of growth in the money supply. The policy was, however, never dogmatically linked to a rigid money rule -- the Reserve Bank was indeed guided by a whole set of macro-economic financial developments such as, in addition to changes in the money supply, growth in the total amount of credit extended by the banking sector, the funding requirements of the Budget, the level of interest rates, changes in the net gold and foreign exchange reserves, movements in the exchange rate of the rand, and, of course, by the level of the rate of inflation. The Bank had certain objectives in respect of each one of these financial aggregates. The objectives were regularly disclosed and were widely debated in the media and elsewhere. They were, in our view, not only consistent with each other but also supportive of the overall objective of reducing inflation, and making South Africa more competitive in the world environment. It is the task of the monetary authorities, that is of the Reserve Bank, to continue to operate within a consistent framework of monetary policy that must at all times take account of the interrelationship of these financial aggregates. It is very tempting for those involved only in certain sectors of the economy, for example in the export business, or in financial institutions, or in securities dealing, to judge monetary policy against the background of their sectoral needs. It is imperative for the central bank to apply monetary policy in the macro-interest, that is in the interest of the total economy. And for the total economy, inflation is bad. Therefore, the central bank has no alternative but to fight inflation, even if it should at times require unpopular restrictive measures.The insistence on a financial approach for monetary policy based on changes in financial aggregates alone, may lead to the fallacy that monetary policy operates in a vacuum and has nothing to do with developments in the real economy, or with the implementation of the other branches of overall macro-economic policy. Monetary policy is, however, an integral part of overall economic policy, and is on a continuous basis influenced by developments in the markets for labour, for goods destined for domestic consumption and capital formation and for goods and services traded internationally. In the end, in economics, everything depends on everything else. Over many years, excessive wage increases created relative price distortions in the South African economy that have led to the present situation where the country is in many areas no longer competitive vis-á-vis the out-side world. At the same time, South Africa is committed to introduce more liberal international trade arrangements in terms of the Uruguay Round of the World Trade Organisation. We must therefore now be even more cautious about wage adjustments, because we already have a situation where the present level of real wage rates are inconsistent with exported growth and more aggressive international competition, and with much needed increases in domestic investment and employment initiatives. We therefore have to contend with two difficult situations in the labour market -- the one the historical result of excessive wage increases (relative to productivity changes), the other the continuing pressure for further excessive wage increases now and in the future. Both situations impede efforts to elevate the growth potential of the South African economy to a higher level on a sustainable basis, and to create more jobs for the absorption of the many unemployed people in the