Address by Mr TT Mboweni, Governor of the South Africa Reserve Bank, at the London Capital Club, London Ladies and Gentlemen, 1. Introduction I was very pleased to have received this invitation to address the members of the London Capital Club today for two reasons. Firstly, I suspect that this club might contain within its history the first seeds of central banking. I believe this Club builds on the proud foundations of the Gresham Club, named after Sir Thomas Gresham. And I was interested to learn that Sir Thomas was an advisor to King Edward VI in 1551 on the financial difficulties facing the country at the time. Sir Thomas implemented a set of plans to overcome these difficulties, which raised the external value of the pound. In his management of these problems, one can perhaps conclude that Sir Thomas was one of the first-ever central bankers. Indeed, Sir Thomas might have had an easier task if England had already followed a policy of inflation targeting at the time as both South Africa and England do today.  The second reason why I am delighted to be here today is that the South African Reserve Bank has a direct association with the London Capital Club. One of our former Deputy Governors, Ian Plenderleith, CBE, serves on the Board of Advisors of the Club. I am therefore indeed honoured today to make a contribution to your deliberations but, more importantly, to enjoy lunch with you. Recent upheavals in the international markets have placed the spotlight again on emerging markets. There is disagreement in the markets as to what this burst of global volatility actually reflects, with answers ranging from inflation concerns, to global liquidity and to the growth outlook. South Africa has in the past few weeks experienced significant movements in the rand exchange rate and stock market prices. These developments may be seen by some as a threat to South Africa’s recent strong growth performance, as well as to the growth strategy of the government. But that should not necessarily be the case. 2. Recent international developments Emerging markets have enjoyed an extended period of investor exuberance and search for higher yield over recent years, which, combined with a generally supportive environment of strong global growth and high commodity prices, have caused their currencies to appreciate, equity prices to increase and bond spreads to narrow. Recently, we have experienced the effects of greater uncertainty about future inflation, interest rates and growth in the major economies. These concerns, combined with a state of general nervousness about the fairly sharp increases recently in the prices of riskier assets such as equities and commodities, caused many investors to pause, take profits, square positions and generally adopt a lower-risk investment strategy. The increased risk aversion of global investors was reflected in a number of indicators: The volatility index of the Chicago Board of Exchange (or the VIX), which gives a general reflection of risk aversion in equity markets, doubled from just below 12 on 10 May to almost 24 on 13 June. Prices of foreign-currency denominated bonds of emerging markets also fell, contributing to an increase in the spread of these bond yields over US Treasuries. The JPMorgan EMBI Plus spread widened from 176 on 10 May to 232 on 13 June. The widening in spreads occurred across all the sub-indices of the EMBI plus, with Latin America the most affected. South Africa’s spread widened relatively less, from around 80 in mid-May to around 90 in mid June. The initial sell-off of higher-risk assets commenced in the US equity markets on 11 May following increased market uncertainty regarding the outlook for global interest rates. A marked decline in the S&P 500 index was followed by similar trends in the equity markets of Europe, Japan and the UK. By mid-June, all the year-to-date gains in most of the major equity markets had been wiped out. Equity prices in some emerging markets were even more affected. The South African equity market, which is dominated by the resources sector, declined by