Statement issued by Dr C.L. Stals, Governor of the South African Reserve Bank. 1. Developments during 1995The main objective of monetary policy in South Africa is to protect the value of the currency, that is, to keep inflation low in the interest of balanced and sustainable economic growth. The rate of increase in the consumer price index measured over twelve-month periods reached a low point of 6,3 per cent in October 1995, before rising again to 6,9 per cent in December. Over the year as a whole, the average rate of inflation of 8,7 per cent represented the lowest for any calendar year since 1972, when it amounted to 6,1 per cent. The rate of inflation for production prices, however, increased slightly in 1995, averaging 9,6 per cent, compared with 8,2 per cent in 1994. Measured over twelve months, the all-goods production price index reached a low of 7,6 per cent in September 1995, before rising again to 8,5 per cent in December 1995.At the beginning of 1995, the Reserve Bank indicated that a rate of increase of between 6 and 10 per cent in the M3 money supply in 1995 would be consistent with the Bank's objective of maintaining overall financial stability. As it turned out, the actual increase in M3 from the fourth quarter of 1994 to the fourth quarter of 1995, was 14,3 per cent. This was the second year in succession that the actual increase in the money supply exceeded the guidelines, after relatively slow growth of only 8 per cent in 1993 and 7 per cent in 1994. Over the past four years, that is more or less during the full period of the current economic upswing, the average annual rate of growth in the M3 money supply, as measured for money supply guideline purposes, amounted to 10,8 per cent.Growth in the money supply in 1995 must be judged against the background of two important related financial developments. Firstly, the Reserve Bank's net gold and foreign exchange reserves last year rose by R9,6 billion which made it difficult for the monetary authorities to restrict the increase in the amount of liquidity available to the banking sector. Secondly, a strong credit demand emanated from the private sector for the financing of increased investment and consumer expenditure. Together with the continuing high overall funding needs of government, severe upward pressure was placed on the demand for credit. The total amount of bank credit extended to the private sector consequently rose by R47,1 billion, or by 17,5 per cent in 1995. This relatively large amount of bank credit extension was the main cause for the increase in the money supply.Against the background of the strong demand for credit, money market interest rates, which had started to rise during 1994, increased steeply in the first six months of 1995 and remained relatively firm in the last half of the year. The rate on bankers' acceptances with a maturity of three months, for instance, increased from 12,50 per cent at the end of December 1994 to 14,20 per cent at the end of June 1995 and 14,60 per cent at the end of December 1995. The monthly average yield on long-term government stock initially receded from a high of 17,02 per cent in January 1995 to 16,62 per cent in July 1995, and then declined further to 14,56 per cent in December. During the first three months of 1996, the financial markets first eased considerably, but were shocked by a sudden change of sentiment in the middle of February when the foreign exchange market came under severe pressure. The nominal effective exchange rate of the rand, measured against a basket of currencies, first appreciated by 0,6 per cent from 1995-12-31 up to 1996-02-15, but then depreciated by 5,1 per cent during the rest of February, and by a further 3,7 per cent during March 1996. The pressures continued during April and the rand depreciated further. The turmoil in the foreign exchange market had a marked effect on capital market interest rates, particu-larly as foreign investors reduced their investments on the Johannesburg Stock Exchange. The yield on long-term government stock first declined from 14,22 per cent