Address by Dr Chris Stals, Governor of the South African Reserve Bank at a Breakfast Meeting of the Insurance Brokers Council of South Africa.           1. IntroductionNobody will deny it that South Africa has extremely high interest rates at this stage. In the context of South Africa's own historical record and measured against a current rate of inflation of about 6½ per cent, nominal interest rates are extremely high. In the context of the world environment, and particularly within the group of emerging market economies, the level of South African interest rates lies in the upper quartile, but is still beaten by a number of other comparable countries. Six of the 24 emerging markets listed in the weekly publication of the Economist, for example, have higher short-term interest rates than South Africa at this stage.Nobody will deny it that the high level of interest rates is bad for the South African economy, particularly at the current stage of the business cycle and a rather depressed domestic economic situation. It is only the few savers we still have in the country, and the old-aged people who live off their interest income, who may benefit from these high interest rates. On the other hand, the high interest rates will most probably reduce consumption financed with borrowed funds, and also investment in fixed capital, equipment and inventories. The future production capacity of the economy is therefore constrained by the present adverse financial conditions. In terms of domestic needs, South Africa now requires a stimulation of the economy, and would prefer lower interest rates to encourage economic development.There is also a fairly general consensus of opinion that the present high interest rates were recently forced on South Africa by the international financial situation. The so-called East Asian crisis that started to surface in Thailand more than a year ago spilled over into the economies of many other countries. Even countries with more stable economies such as Australia, New Zealand and Canada were adversely affected by these developments. Emerging countries far away from the East Asian epicentre such as Mexico, Colombia, Brazil and Venezuela have been infected by the problem. Countries with economies in transformation such as the Czech Republic and Poland also suffered and the recent catastrophic developments in Russia cannot be completely divorced from the East Asian crisis. In the end, South Africa also could not escape from the turmoil.There are major differences of opinion among economists inside and outside of South Africa on what the reaction of the official macroeconomic policymakers in South Africa should be to soften the blows for the economy. At the one extreme there is the International Monetary Fund that believes that much more restrictive monetary and fiscal policies should have been applied in South Africa in recent months to fend off the attacks of international speculators and short-term profiteers.At the other extreme we find economists in South Africa with major private sector interests who believe that the Reserve Bank should have kept interest rates artificially low with a complete disregard of the consequences this would have had for the exchange rate of the rand and subsequent inflation. There are those who believe that the Reserve Bank should have done more to keep the exchange rate stable, even if it should have required the reintroduction or tightening of exchange controls.There are many naive critics in South Africa who believe that the Reserve Bank is fully responsible for the high interest rates and that the Reserve Bank indeed used its mythical powers to force interest rates to these destructively high levels. In their ignorance they believe that the Reserve Bank can even at this stage pull the rabbit from the hat and instantaneously bring interest rates down again. Unfortunately, in the real world such miracles are just not possible. 2. What caused interest rates to go upTo avoid confusion in this debate, the real causes for the recent sharp rise in interest rates should be revi