Address by Mr T.T. Mboweni, Governor of the South African Reserve Bank, to the Bureau for Economic Research Annual Conference, Johannesburg, 22 May 2008  Honoured guestsLadies and Gentlemen: 1.  Introduction The monetary policy framework in South Africa is facing its most severe challenge since the inception of inflation targeting in the year 2000. Inflation pressures have been building up strongly, and the most recent CPIX figure of 10,1 per cent is significantly above our inflation target and inconsistent with price stability. These pressures originated primarily from exogenous shocks such as oil, food and electricity price developments. However it is clear that inflation pressures have become more generalised, as evidenced by the continuous upward trajectory in the core indicators. For example, in June 2006 CPIX excluding food and energy measured 2,5 per cent. By April this year it had risen to 5,6 per cent, and indications are that this measure could rise further. Of great concern is the significant deterioration of inflation expectations, which will give further impetus to these inflationary pressures. Over the past year inflation expectations have drifted upwards gradually, but nevertheless appeared to remain anchored within the inflation target range. This picture has changed significantly in the first quarter of this year. We have now observed the biggest increase in inflation expectations since the inception of the inflation expectations survey eight years ago. Reference here is made to the BER inflation expectations survey conducted on behalf of the South African Reserve Bank (SARB). This, together with the possible upward trend in unit labour costs, does not bode well for the inflation outlook going forward. In response to these developments, and to the robust domestic demand that we have been experiencing, the monetary policy stance of the South African Reserve Bank has been tightened since June 2006 by a cumulative 450 basis points. The SARB, more specifically the Monetary Policy Committee (MPC), has been criticised by some commentators now that inflation has breached the upper limit of the target range, and this is interpreted as a sign of lack of determination, commitment, and the will to achieve and maintain price stability. At the same time, others have suggested that the degree to which the SARB has responded to those inflation developments has been excessive, too strict, dogmatic like inflation targeting “nutters”, insensitive to the plight of the poor, that monetary policy is after-all powerless in the face of supply side shocks, and that these actions have demonstrated a lack of concern for growth and employment in South Africa. Nothing can be further from the truth. 2.   The inflation targeting framework At this point it may be useful to make a few comments about inflation targeting in general. Some recent statements from many commentators about the appropriateness of inflation targeting often seem to misunderstand what the framework is about. Here we wish to emphasise the word framework, because that is what it is. It is not a policy, and it is not an instrument. It is not a dogma. Take away inflation targeting, and we will still have monetary policy, we will still have the same instruments of monetary policy, and the Bank will still have a constitutional mandate to maintain low inflation. Furthermore, any central bank worth its salt would want in any case to achieve and maintain price stability, meaning low and stable sustainable inflation levels. So even if we did not have an explicit inflation target as set out in the inflation targeting framework, we would still want to pursue price stability. Central banks are in the business of price stability. Our monetary policy objectives would therefore remain the same, and we would face the same challenges as we confront today on how to respond to exogenous shocks and second round effects. It should be noted that it is not only formal inflation targeting central banks that successfully pursue a low inflation objective. The US Fed and the European Central