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Address by Mr TT Mboweni, Governor of the South African Reserve Bank at the Conference of the Bureau for Economic Research, Stellenbosch, 18 November 2004 1. INTRODUCTION Chairperson, ladies and gentleman, I have been asked to share my views with you today on what will happen with monetary policy in the next ten years. Looking into the future is always a hazardous undertaking. It requires a careful analysis of what has changed already and what likely changes will occur in the coming years. Such an analysis cannot only concentrate on what has happened in South Africa, but must also take into account the structural changes in the rest of the world and how these developments could perhaps affect South Africa. This is indeed a formidable task. In the next thirty minutes I will do my best to give you my view on these matters. 2. STRUCTURAL CHANGES IN THE WORLD'S FINANCIAL SECTOR World War I and the great depression of the 1930's left the world with highly regulated capital markets and a disintegrated international financial system. The highest priority was therefore attached to restoring multilateral payments and current account convertibility towards the end of World War II, which led to the Bretton Woods Agreement and the General Agreement on Tariffs and Trade. In the period after the war, the emphasis shifted to the liberalisation of trade and payments. Progress with these reforms was relatively slow and at first concentrated on the currency convertibility of current account transactions. In the 1980's the authorities of the industrialised countries began liberalising financial systems, which were later followed by a number of emerging-market economies. The convertibility of the capital account of the balance of payments gained further momentum with the negotiations in the World Trade Organisation to liberalise transactions in financial services. This financial liberalisation was accompanied by a process of globalisation, i.e. a growing economic interdependence of countries became discernible through the increasing volume and variety of cross-border transactions and through the rapid and widespread diffusion off technology. New technological advances reduced transportation, telecommunication and computation costs, thus greatly increasing the ease with which national markets may be integrated at the global level. The liberalisation and globalisation resulted in a growing interdependence of national financial markets. Although these markets still do not form a single global market, the degree of interdependence is already strong enough to have altered the environment in which monetary policy is conducted. In particular, it has affected the volume of international financial transactions. International transactions in goods and services have become considerably less important than financial transactions. The closely linked financial markets have changed the monetary transmission mechanism, and shocks that occur in one country can easily have an impact on other countries. As a transition phase of or perhaps as an alternative to globalisation, considerable emphasis has been placed on closer international co-operation, convergence and integration since the end of World War II. Many regional economic co-operation arrangements have been formed or are under consideration. The aim of these regional arrangements is to free international trade and financial transactions between a group of countries. But many of them also want to encourage the movement of labour across domestic frontiers and the eventual attainment of political unions. The establishment of the European Union is, of course, the best example in this regard. This regional arrangement has created the largest government bond market in the world and led to the development of the euro into a major international currency. Another important structural change in the world's financial market has been the achievement of greater price stability. Over the past twenty years the rate of inflation has declined dramatically in most countries of the world. The disinflation process was at