1. INTRODUCTIONThe task of macroeconomic policy is the promotion of economic growth and development, the creation of more jobs and the employment of more people, the improvement of the living conditions of all the people of the country, and the elimination of unjustifiable discrepancies between average incomes of various groups of participants in economic activity.  Monetary policy, being a part of macroeconomic policy, has but an intermediate role to play in the implementation of overall macroeconomic policy. Monetary policy is expected to create and maintain a stable financial environment within which overall economic activity can be expanded. None of the above ultimate objectives of macroeconomic policy will be attainable in an environment of unstable financial conditions. Although overall financial stability by itself cannot guarantee the achievement of the ultimate macroeconomic objectives, it is an important precondition for reaching those goals. To comply with its obligation and meet its commitment, the central bank should pursue its objectives with a medium- and longer-term view in mind. Financial stability should, for example, be maintained throughout the business cycle in both the expansion and contraction phases of the economy, and should in the democratic political system of periodic elections, stretch beyond the duration of successive governments. It is inter alia for this reason that central banks need some autonomy for the execution of their duties. 2. PRIMARY OBJECTIVE OF THE BANKThe primary or strategic objective of the Reserve Bank is therefore to achieve and maintain stable financial conditions in the country. This objective is spelled out in both the Constitution of the Republic and in the South African Reserve Bank Act. In these acts it is recognised that only by protecting the currency can balanced and sustainable economic growth be achieved.   The question may be asked what is meant by the term financial stability? In a broad sense financial stability can be defined to include price stability as well as stable conditions in the financial sector as a whole. Price stability is achieved when changes in the general price level do not materially affect the economic decision-making process. Although relative price movements will still have an impact on production, consumption and investment, the rate of inflation or deflation is not an important factor in the decisions taken by producers, consumers and the authorities under stable price conditions.The stability of key institutions and markets in the financial system is achieved when there is a high degree of confidence that the financial infrastructure of the economy is able to meet the requirements of market participants. However, it is important to realise that financial stability does not exclude the failure of individual banks or financial institutions. A financial institution can go bankrupt in stable financial conditions. It is only where systemic risks arise, i.e. where the financial sector as a whole may be influenced by an incident, that the situation can be described as financially unstable.  The two elements of financial stability, i.e. price stability and stability of the financial sector, are closely related. Failure to maintain one of these elements provides a very uncertain operating environment for the other, with causality running in both directions. For example, high inflation can lead to tighter monetary policy, higher interest rates, an increase in the non-performing loans of banks and a fall in asset and collateral values, which can cause bank and other failures in the financial sector. Conversely, disruptions in the financial system will make the transmission mechanism of monetary policy less effective and can materially affect changes in the general price level.  3. WHY IS IT IMPORTANT TO MAINTAIN FINANCIAL STABILITY?There are many convincing reasons why financial stability is regarded as a prerequisite for the promotion and support of economic development. All modern market-oriented economies are based on the extensive use of mone