Address by Mr TT Mboweni, Governor of the South African Reserve Bank, at the Beeld / Investec Guinness Flight Economist of the Year Banquet, Johannesburg. 1. INTRODUCTION The South African financial markets have been characterised by great uncertainty in the recent past, leading to a depreciation in the external value of the rand, a decline in share prices and a rise in long-term interest rates and yields. Money market interest rates have remained relatively stable mainly owing to the monetary policy stance adopted by the Reserve Bank. The uncertain conditions in our financial markets were to a large extent due to the strength of the United States dollar, volatility in international financial markets, changes in oil prices and concerns about political developments in Sub-Saharan Africa (SSA), whereas domestic fundamental economic and political factors remained sound and could not be blamed for these episodes. In my address tonight I want to discuss these developments in some detail and will concentrate on(i) the more important recent developments in the domestic financial markets;(ii) the factors responsible for the greater uncertainty in the markets;(iii) the underlying fundamental factors favouring strong financial markets; and(iv) the monetary policy stance adopted by the authorities in these circumstances. 2. DEVELOPMENTS IN FINANCIAL MARKETSFrom the beginning of the year 2000, our currency, the rand, has depreciated sharply against the United States dollar from a level of R6,15 to the dollar at the end of 1999 to more than R7,00 to the dollar from the first week of May 2000. This represents a depreciation of approximately 15 per cent. The rand also depreciated considerably against the United Kingdom pound and Japanese yen, but faired better against the euro. As a consequence, the weighted average value of the rand has declined by about 7 per cent from the end of 1999 to 11 May 2000. This is nevertheless a significant decrease in the nominal effective exchange rate of the rand which was well in excess of the inflation differential between South Africa and its main trading partners and competitors. After adjustments for these price differentials, the decline in the real effective exchange rate of the rand was probably between 3 and 4 per cent in the first 4½ months of 2000.The weakness of the rand was one of the factors responsible for a reversal in the downward movement of long-term interest rates and yields in South Africa. Domestic bond yields moved sharply downwards in the last four months of 1999 as sentiment in the market for fixed interest securities was positively influenced by the relatively low level of inflation, the fiscal discipline entrenched in the budget of the government and the introduction of an inflation-targeting monetary policy framework. In addition, a prominent credit rating agency, Standard and Poor’s, upgraded South Africa’s foreign-currency denominated debt to an investment grade in February 2000.At the beginning of January 2000 this downward movement in the yield on government bonds came to an end. The daily average yield on these bonds increased from a low of 13,12 per cent on 18 January 2000 to 15,20 per cent on 10 May 2000. The level of the yield curve shifted higher across the full maturity spectrum, with a more pronounced upward movement at the longer end of the curve. Despite this upward movement in rates, the inflation-adjusted yield on long-term bonds rose only marginally because of the rise in overall consumer price inflation, excluding mortgage interest costs, as measured for metropolitan and other urban areas, the so-called CPIX (mu).Trading activity on the Bond Exchange of South Africa was boosted by the uncertainty in the market. Turnover in the secondary bond market increased from an already high average quarterly value of R2,2 trillion in 1999 to an all-time high of R2,8 trillion in the first quarter of 2000. In April 2000 the value of transactions on the Bond Exchange amounted to R0,8 billion.The uncertainties in the foreign exchange market were also reflected in developme