Address by Mr T.T. Mboweni, Governor of the South African Reserve Bank, at the biennial Congress of the Economic Society of South Africa, Pretoria. INTRODUCTIONIn my Governor's Address at the Ordinary General Meeting of Shareholders of the Reserve Bank on 24 August 1999, I stated that it is advisable to move away from the "eclectic" or informal inflation-targeting monetary policy framework to formal inflation targeting. This change is necessary because the eclectic framework has at times created uncertainties about Reserve Bank decisions and actions which were perceived as being in conflict with the stated guidelines for the growth in money supply and bank credit extension.The question may be asked whether the adoption of inflation targeting will lead to a more effective monetary policy? I believe that this will be the case and that inflation targeting should minimise the social and economic cost of achieving price stability. In my address this evening I want to explain this position that has been taken by the Reserve Bank by elaborating on the following aspects of inflation targeting, namely: What are the main characteristics of inflation targeting?What are the advantages of inflation targeting?Are there any disadvantages in shifting to an inflation-targeting framework?What are the preconditions that have to be met before implementing inflation targeting?What factors should be taken into consideration with the implementation of inflation targeting?  CHARACTERISTICS OF INFLATION TARGETINGA number of industrial countries, such as New Zealand, Canada, the United Kingdom, Sweden, Finland, Australia and Spain, have adopted an inflation-targeting framework during the 1990s. More recently some of the developing countries have also opted for this monetary policy framework. The Czech Republic has operated a fully fledged inflation targeting regime since December 1997. Israel, Chile and Mexico are countries that have one-year inflation targets, while Poland, Hungary and recently Brazil have multi-year inflation targets.The motives for the adoption of inflation targeting have varied considerably from country to country. In some countries, such as the United Kingdom and Sweden, the collapse of their exchange rates led to inflation targeting in order to assure the public that monetary policy would remain disciplined. Other countries, such as Canada, introduced inflation targeting because of problems experienced with the targeting of monetary aggregates.Whatever the motives of the countries were, the adoption of an inflation-targeting strategy in all cases reduced the role of formal intermediate targets or guidelines, such as the exchange rate or the growth rate in money supply. Commitment to an intermediate target would be inconsistent with inflation targeting except if it is the only determining factor of inflation. Obviously this is unlikely. Although growth in money supply is a precondition for a general rise in prices, it is not the only factor that causes inflation.In an inflation-targeting framework the central bank has to adopt a strategy of determining directly what the likely path of inflation will be. In inflation targeting close attention is typically given to changes in indicators which in the past have affected inflation. This has led to sophisticated models for the prediction of inflation and detailed assessments of factors that could affect it. The prediction of inflation is of the utmost importance in the implementation of monetary policy, because changes in policy measures are based on likely future price developments.The fact that inflation targeting has to rely on forecasting has led to the criticism that this is a weakness of the technique because forecasts are inherently unreliable. Although it is true that an inflation-targeting framework is based on forecasts, it is also true that any other monetary policy framework has to take account of the fact that policy changes will only affect inflation some time in the future. If the objective of the central bank is the attainment of financial stability, it will always