the eurozone as a single currency area. increasing reliance was placed on monetary policy and, as interest rates reached their zero lower bound in a number of the advanced economies, a range of unconventional policies were introduced, including quantitative easing, which is a process whereby the central bank injects money into the economy by buying government bonds or other assets. the subsequent combination of high liquidity and low interest rates led to a global search for yield, and consequently reinforced strong capital flows into emerging market economies, which had generally recovered from the recession by late 2009. emerging markets, led by china, were seen to be the new engine bis central bankers ’ speeches for global growth, and this development was seen as a tectonic shift in the balance of economic power around the globe. however, these capital inflows created challenges for emerging market economies, as the resulting exchange rate appreciation undermined competitiveness. some emerging markets complained about “ currency wars ” and various policies were implemented to stem these inflows, with very mixed success. but at the same time, stronger exchange rates did help to constrain inflationary pressures, allowing monetary policy more freedom to focus on providing some stimulus to the hesitant growth recovery. a notable structural change in the nature of these capital flows was the predominance of flows into domestic currency bond markets in emerging market economies, with nonresidents holding increasing proportions of domestic bonds. south africa ‘ s experience was no different. in the pre - crisis period, the bulk of portfolio flows to south africa were to the equity market. since 2009 until recently, bond flows predominated and non - resident ownership of the outstanding stock of bonds increased from around 12 per cent in 2007 to around 38 per cent currently. this change in the pattern of flows reinforced the downward pressure on long term bond yields. although this did not have the positive effect on private sector investment that one would generally have expected, it did have a significant effect on the cost of borrowing by government at a time when the counter - cyclical fiscal policy of national treasury was relatively expansionary. these flows also helped to finance the widening current account of the balance of payments. so what has changed? we now appear to be entering a new but still highly uncertain phase of the crisis. growth in the emerging market economies, including china, has been declining, and earlier optimism that emerging markets could decouple from the advanced economies has faded somewhat. at the same time, there are some signs of recovery in the us

months, largely due to external cost - push factors. the main factors behind the upward trend in inflation have been food, and transport prices. food price inflation increased from 3, 5 per cent in february 2011 to 4, 8 per cent in april, while petrol prices increased at a rate of 16, 3 per cent. other administered prices also placed upward pressure on prices, with electricity increasing by 19, 0 per cent in april. administered price inflation increased by 10, 7 per cent in april, driven by a 12, 1 per cent increase in the regulated component. if one excludes administered prices from cpi, the cpi would have measured 3, 1 per cent in april. so far, these developments have not filtered through to broader price pressures and the appreciation bias in the rand exchange rate for most of this year, has helped to contain price pressures. that said, april inflation data does suggest that core measures may be beginning to rise. the bank has revised higher its inflation forecasts over the past few mpc meetings. the main risks to the inflation outlook continue to emanate from cost push pressures, including administered prices. while annual inflation rates are expected to average 5. 1 per cent and 6. 0 per cent in 2011 and 2012, respectively, our latest forecast shows that inflation is expected to breach 6 per cent in the first quarter of 2012 and to peak at 6, 3 per cent. inflation is expected to return to within the target range thereafter, but remain close to the upper end of 6 per cent. the breach is likely to be temporary, but is also dependent on further developments in food and oil prices and the potential second round effects, and the risk that these price pressures feed through to more generalised inflation. the recent decline in oil prices and moderation in international food prices to some extent alleviates some of the inflationary pressures that have confronted the south african economy. another risk factor on the domestic front is the developments in wage inflation. despite high unemployment, wage increases remained in excess of inflation and in the first quarter of 2011, measuring 8, 2 per cent according to andrew levy employment publications. at the same time, labour productivity has declined, resulting in an increase in unit labour costs. despite the upward revision to the inflation forecasts, the repurchase rate was maintained at 5, 5 per cent at the most recent mpc meeting in may. this is essentially due to the large influence of exogenous factors on current and projected inflation trends. the mpc is