uncertainties that are currently prevailing. switzerland, as a model of macroeconomic rectitude and with its safe banking system, is a good example of this. in the context of increasing risk aversion, there is a search safety rather than for yield. the interest returns from investing in switzerland are minimal or negative, yet the country continued to receive significant capital inflows causing the swiss franc to appreciate to uncomfortably strong levels. attempts to stem the tide in 2010 through intervention were eventually abandoned after losses of around chf 30 billion were incurred. at that stage the swiss franc exchange rate was around chf 1, 45 to the euro. more recently, when the franc reached close to chf 1 against the euro, the swiss national bank reentered the market and announced its intention to prevent the franc from appreciating beyond chf 1, 20. to date they have been successful, but it is unclear whether this will be sustainable in the face of an extreme bout of risk aversion in financial markets. while flexible exchange rates help with adjustment, these adjustments are not easy or without costs. south africa ’ s attractiveness to capital flows and consequent appreciation pressures was in part due to the search for yield in an environment of abnormally low interest rates in the advanced economies. but the exchange rate response to risk aversion is the opposite to that of the swiss franc. since late july, as the eurozone crisis intensified, the rand, along with numerous other emerging market currencies depreciated. since july 2011, the rand has depreciated by about 20 per cent against the us dollar, and has traded in a range of between r6, 65 and r8, 50. as is often the case, the rand tends to be one of the more volatile currencies. nevertheless these movements have been mirrored in a number of other currencies, for example the mexican peso and the brazilian real. these exchange rate developments have implications for monetary policy. as was noted in the mpc statement, the exchange rate is now seen to impart an upside risk to the inflation outlook. how inflation responds to exchange rate movements depends on a number of complex factors, including the speed, duration and the extent of the depreciation. small changes usually have a relatively small impact on inflation, as is the case where the depreciation is expected to be of limited duration. furthermore, the extent to which pricing was

gill marcus : assessing the risks to the inflation outlook – the challenges to monetary policy in highly uncertain times address by ms gill marcus, governor of the south african reserve bank, to the swiss chamber southern africa, johannesburg, 15 november 2011. * * * thank you for the opportunity to address the swiss chamber today. one of the many demands of being a governor is that of travel. and it is in this capacity that over the past two years i have had the privilege of visiting switzerland on a regular basis, as basel is the home of the bank for international settlements ( the bis ) – the bank for central banks. it is indeed a beautiful country, and one of the advanced economies that is experiencing the challenges arising from significant inflows of capital as investors seek safe havens. south africa has had long - standing trade and financial ties with switzerland, and in these troubled times it is important that such relationships are not only preserved but enhanced. we are certainly living in interesting but difficult times, because the possibility that things can go horribly wrong are very high. a break - up of the eurozone, previously unthinkable, is now being mentioned by some of the european leaders who had previously dismissed such speculation. but even a less catastrophic scenario of a disorderly greek default could have a disproportionate impact on the global economy. unfortunately we do not know how long this process is going to take, and various attempts to resolve the problem have simply kicked the can forward, and perhaps bought more time. the dramatic leadership changes over the past week in both greece and italy demonstrate just how urgent the need for concrete and credible action is. we do know that we are getting closer to the end game at what seems to be increasing speed, but we do not know when that will happen and what form it will take. this makes policy - making extremely complicated, as it is difficult, if not impossible, to meaningfully quantify the risks, and build them into policy decisions. it is against this heightened global uncertainty that the monetary policy committee met last week, and decided to keep the repurchase rate unchanged at a 30 year low of 5, 5 per cent. the mpc assessed the risks to the inflation outlook to be on the upside, and today i will expand on two interconnected risks that featured strongly in the mpc deliberations, namely the global outlook and the impact of the exchange rate. as has been the case for the past two years or so, risks to