Speech by Mr T Mboweni, Governor, South African Reserve Bank, at the Cape Times Business Breakfast1.           Introduction Against the backdrop of a weak international economy, the salient recent economic developments in South Africa from the Reserve Bank’s perspective are the promising trends in inflation, the slowdown in the pace of domestic economic activity and the behaviour of the exchange rate of the rand. Before we address these issues, however, we would like to briefly reiterate the Bank’s mandate and our view of our role in the economic growth process.  According to the Constitution, the task of the Bank is to protect the value of the currency in the interest of balanced and sustained economic growth in the country. The overriding objective is therefore price stability, by which we mean achieving and maintaining a low and stable rate of inflation. Within the inflation targeting framework, we have been mandated by Government to achieve an inflation target of 3-6 per cent. Achieving low inflation is not an end in itself: it is important because it is a prerequisite to the growth process. Furthermore, from a welfare perspective, the distributional impacts of high and variable inflation are such that it is generally the poor that are hardest hit by inflation as they are the least able to protect themselves or hedge against this. It is sometimes argued that by focusing on inflation we are not concerned about growth. As I have just stated, our longer-term concern is precisely with economic growth, employment creation and sustainable development. At issue then are short-term growth fluctuations. Although this is not our primary focus, it does not mean that we ignore cyclical movements. Most central banks, even inflation targeting central banks, are concerned with such fluctuations, but central banks may differ in terms of the weight they put on these fluctuations in their reaction function. Some central banks have a dual mandate and therefore have to focus more directly on cyclical growth whereas others, such as in our case, have a single mandate. It is also generally the case that in the early phase of inflation targeting, a greater weight is put on inflation as credibility is built up. Although inflation is our main objective, we are nevertheless sensitive to the real effects of our policy actions. In any event, the current and particularly the expected state of the domestic economy is an important consideration in making monetary policy decisions. The state of domestic demand is an important determinant of inflation, so, although we may not be targeting short-term growth, our monetary policy is not set independently of such developments. 2.           Inflation developments As is now well known, the depreciation of the rand during the last quarter of 2001 resulted in a surge in inflation which prevented us from realising our inflation target for 2002. We had been well on course to achieving that target, with CPIX inflation having fallen below the 6 per cent level in September and October of 2001. Since November 2001, inflation accelerated and the average for 2002 was 10 per cent, 4 percentage points above the upper band of the inflation target. Fortunately CPIX inflation appears to have peaked in November of 2002 at 12,7 per cent. Since then we have seen a gradual decline, with rates of 11,3 per cent in February and 11,2 per cent in March. At these levels, we are still significantly far off from our inflation target of 3-6 per cent. However, there are a number of pointers to a sharper decline in the inflation rate over the next few months. Firstly, the quarter-on-quarter figures which give a better indication of the short-term trends show that on an annualised basis CPIX decelerated from 14,5 per cent in the fourth quarter of 2002 to 6,7 per cent in the first quarter of 2003. What was particularly gratifying was that the main driver of inflation in 2002, food price inflation, fell steeply from an annualised rate of 18,7 per cent to only 2,4 per cent over the same period. Secondly, to the extent that the Producer Pri