direction of encouraging more coherence in euro area macroeconomic policy. as europe ’ s inflation rate has declined, the ecb has begun urging governments to consider some easing of budget consolidation while expanding its own monetary easing programme. and the president of the ecb has emphasised that this must be accompanied by structural reforms, which would pay off now as well as later if they could be locked in alongside policy easing. this may create confidence that european governments understand their challenges and have the will to address them. the impact of ecb policy easing should be to sustain a depreciation of the euro against the usd, both nominal and real. cees bruggemans has reminded us recently that when the us dollar and euro change directions, they do so much more than analysts tend to realise and over significant time frames. 5 according to dti data, the african share as a per cent of sa ’ s total trade with the world increased from 11. 4 % in 2007 to 19. 8 % in 2013. between 2011 and august 2014, the rand depreciated by 29. 7 % against the euro ( compared to 32. 6 % % to the usd ). cees bruggemans, “ dollar & euro part ways, ” rex column, 8 september 2014. bis central bankers ’ speeches as the fed ’ s purchases of mortgage backed securities dwindle to nothing, the ecb will buy about 1 trillion euros, returning its balance sheet to 2012 levels. 6 it will also buy asset backed securities. the impact of this on the rand will be to encourage depreciation against the us dollar and some appreciation against the euro, but the net effect on the rand ’ s nominal effective exchange rate will also be affected by commodity price trends. we don ’ t expect that the ecb ’ s easing programme will offset normalisation on a one for one basis. it may delay or slow the process, drawing out the global normalisation process. 4. south african monetary policy fortunately, the direct implications of normalisation for south african policy settings at this point in time are reasonably straight - forward. rising global interest rates will put downward pressure on the value of the currency, at least in the short term, and push up interest rates. the less responsive short term rates are to this upward pressure, and the stronger the buildup of inflationary pressures in the wake of depreciation, the steeper the yield curve is likely to get. long - term borrowing costs will take the

to achieve and to assist in correcting macroeconomic imbalances. we can also expect, however, that normalisation will generate volatility in the short - term. our policy framework allows for most of the volatility to remain in the foreign currency market, thereby enhancing stability in the real economy. further dampening of volatility can be achieved by ensuring effective policy communication across monetary and fiscal domains. we have in place the right kind of macroeconomic policy framework to facilitate the adjustment to external and internal shocks, both those hitting us now and those we will experience in future. this policy framework enables policy makers and investors to see through near term volatility, keeping policy rates and adjustments minimal and efficient, and economic fundamentals more stable. this is critical to enabling public and private sector actors to keep their eyes on the real economy backdrop – the improvement in global bis central bankers ’ speeches conditions – and seek ways to strengthen our ability to take advantage of it through rising investment. before i discuss sa policy normalisation, let me first say a few words about the global economy and its effects on south african conditions. 2. us policy normalisation the us economy has achieved critically important gains over the past year. unemployment has fallen faster than expected and is now approaching its natural level. the budget deficit has fallen steeply since the crisis and fiscal policy has also become more predictable. new estimates of future health care costs from the cbo ( us congressional budget office ) suggest long run fiscal prospects are much rosier than previously thought. technology and resources, particularly the shale boom, have provided new sources of economic growth, perhaps enabling a further permanent improvement in the us trade deficit and balance of payments. inflation to accelerate certainly, we stand at the beginning of a long path to normalisation of us policy. but the pace of normalisation is less certain and will depend on data and how the federal reserve interprets inflationary pressures and the economic recovery. the productivity enhancing effects of shale oil developments will tend to weigh against rising inflation in the us. but this structural downward force on inflation may be offset by the decline in the us labour force participation rate. so far, we have seen unemployment fall sharply without generating sustained inflationary pressures. if the decline in the labour force participation rate is permanent, then, as gdp rises, there will be greater pressure on wages and prices – with falling participation the labour market tightens more quickly. other longer term factors, like less immigration and the on - going re -