Address by Mr. T.T. Mboweni, Governor of the South African Reserve Bank, at the annual banquet of the Institute of Bankers, Johannesburg. 1. INTRODUCTIONGood evening ladies and gentleman. I thank you for inviting me here this evening to speak at this prestigious event. The Institute of Bankers is an important organisation and encompasses an industry that is, as I am sure you are well aware, crucial to the South African Reserve Bank as a partner in our commitment to maintain and enhance the stability of the country’s financial sector.My remarks this evening centre on "Transparency and the Public Understanding of Monetary Policy". The public understanding of what we aim to do at the Reserve Bank is something that concerns us deeply. It is something that should go hand in hand with the work of the Bank and it is central to the Bank’s commitment of making monetary policy transparent to the people affected by it – the citizens of South Africa.First I will discuss the Reserve Bank’s monetary policy framework and the developments that have occurred in this area recently. I will then move onto the institutional arrangements for the conduct of monetary policy, the work of the Monetary Policy Committee and the Bank’s modelling and forecasting activities. Finally, I will say a few words about the central objective of the South African Reserve Bank. 2. THE MONETARY POLICY FRAMEWORKWe announced the adoption of the inflation targeting monetary policy framework in February just over a year ago. The formal adoption of an inflation targeting framework indicated a shift from the previous informal policy framework. In the past, monetary policy had embraced an eclectic approach in which recognition was formally given to a medium to longer-term stance of monetary policy by monitoring developments in a number of financial aggregates and not only money supply and bank credit extension. The eclectic approach to monetary policy was applied during the 1990s, against the background of explicitly articulated guidelines for money supply growth. This framework recognised that the Reserve Bank had to combat inflation, as outlined in the Constitution and the Reserve Bank Act. However, since the Bank’s policies had their most direct impact in the area of money and credit, intermediate guidelines were set for growth in money supply. It was argued that if money supply growth could be contained, too much money would not be chasing too few goods, and inflation would be brought under control.While formally it was stated that broad money supply growth should fall in the range of 6 to 10 percent per annum (since the mid-1990s), in practice the Bank adopted a relatively flexible approach where these guidelines were indeed treated as guidelines only. A further guideline for growth in total bank credit extension of around 10 percent was also adopted. But when these guidelines were exceeded by considerable margins, this was on occasion tolerated without strong policy adjustments, on the basis of developments in other variables. In practice it was quite apparent that growth in the money supply could sometimes be a misleading indicator of current and future inflation. Accordingly, a number of other variables were also analysed in deciding upon the appropriate monetary policy stance. These included the pace of growth in the banking sector’s credit extension, movements in consumer price and production price inflation, domestic production and expenditure, the balance of payments and exchange rate situation, and the fiscal policy stance. The inflationary potential of developments in all these and many other variables was assessed on an ongoing basis. Accordingly, growth in money supply was not really the pivotal variable around which monetary policy revolved - although excessive growth in money supply certainly did signal the need for additional caution. However, money supply growth was deemed to be important and was formally recognised as the intermediate target variable. What has since changed? Instead of targeting guidelines for intermediate objectives, the Reserve B