Remarks by Mr TT Mboweni, Governor of the South African Reserve Bank at the Pretoria National Press Club.Today I have decided to make some remarks about monetary policy, monetary policy and making in South Africa. Whilst I am fully aware that most of you would like to know about the future developments in interest rates, I will however disappoint you since there will be no "open mouth operations" today. What I thought of doing was to take you systematically through the steps which leads the Monetary Policy Committee to take decisions on monetary policy. I have made the rather crude assumption that most of you are not monetary economists – I am using Yusuf Abramjee as my benchmark! 1. What is monetary policy? Let us start from the beginning and consult The New Oxford Dictionary of English. It says on page 1193 that, "Monetary: adjective of or relating to money or currency "(1998 Edition). Therefore by deduction, monetary policy must be actions or decision "relating to money or currency". This is not very helpful at all. And so let us check some textbooks to see what they say monetary policy is. Burda and Wyplosz, in Macroeconomics A European text, p13 say that "Monetary policy is directed at influencing interest and exchange rates, and more generally at conditions in financial markets and their links with the real economy". So Burda and Wyplosz focus on interest rates, exchange rates, conditions in the financial markets and the impact on the real economy. This goes some way towards explaining monetary policy. But to the ordinary citizen this might be confusing. Frederick Fourie, writing for third year and perhaps honours students says in his book, How to Think and Reason in Macroeconomics, that monetary policy is defined as "All deliberate steps of the monetary authority (central bank) to affect monetary aggregates (money supply), the availability of credit, and interest rates, in order to influence monetary demand, income, production prices and the balance of payments. This a little more helpful. I would have said that monetary policy is about the deliberate decisions by the central bank to influence short-term interest rates. Or put simply, monetary policy relates to the decisions by the central bank on interest rates. Interest rates by definition will affect a whole range of variables in the economy: money supply, credit, demand, income, production prices, asset prices, the exchange rate, balance of payment, investment, inflation, etc. The central issue therefore is interest rates. 2.   What are the instruments available for monetary policy? There has been a lot of talk recently by many people, including people who are supposed to be in the know (but have shown themselves to be ignorant), about the need for the central bank to use other instruments to fight inflation instead of interest rates. The primary source of the confusion about the existence of other instruments is to be found in people thinking about credit ceilings, open market operations, the repo rate and cash reserve requirements. Let me deal with each one of these below.  2.1. Credit Ceilings Credit ceilings are quantitative limits on credit extension by banks. Each month every bank has to submit a detailed balance sheet to the Registrar of Banks.  Credit ceilings can impose a freeze on each bank's total credit extension, or it can limit the growth in credit extension to a certain value such as one per cent per month. Penalties can be imposed on banks extending too much credit. This method of controlling bank lending and money creation was used in South Africa from 1965 to 1972 and 1976 to 1980. The results were disappointing. Economic agents found ways around the credit ceilings. Non-bank companies with surplus funds started lending it directly to companies with deficits, and friends started lending to each other. Politicians also started to intervene, pleading for lifting of the credit ceilings on non-commercial grounds for certain types of borrowers or activities. 2.2.  Open Market Operations Open market operations involve the buying and selling of gove