‘ original sin ’. there are, however, concerns that the increased holdings may make us more vulnerable to changes in non - resident sentiment. in the context of concerns about the impact of possible sovereign ratings downgrades, the narrower current account deficit implies a lower financing requirement. it puts us in a better position to cope with a possible portfolio capital outflow or reduced inflows. furthermore, the fact that south africa has a positive international investment position also means that we do not have a ‘ fear of floating ’ as is the case in a number of other emerging markets, where foreign - currency liabilities are relatively high. under those circumstances, currency depreciations have significant negative balance - sheet effects. the floating rand remains a key shock absorber for the economy, assisting in the correct direction of economic adjustment and making a market in rand assets. that is not to say that we will emerge unscathed should our local - currency debt be downgraded to sub - investment grade. there is little doubt that such a move would impact negatively on the rand, government bond yields, and confidence. short - term page 3 of 9 overshooting of the currency is likely, with some longer - term level change and passthrough into inflation expectations. but the exact long - term impact is uncertain. estimates of the possible extent of selling by index - tracker funds range between r100 billion and r180 billion. the short - term impact will also depend on how much is already priced into the markets, the extent to which exposures have already been reduced, and whether the buyers of these bonds are residents or non - residents. while south africa ’ s risk premiums have increased in line with those of countries that are subinvestment grade, the possibility of an additional deterioration is high as the broader downgrade shock is felt in medium - term decisions of households and firms. from a monetary policy perspective, a central objective is to reduce the impact that currency volatility and level shifts have on the inflation trajectory. and while passthrough, as in other economies, has been weaker in the post - crisis period, we saw greater price responsiveness to rand strength early this year. we should be cautious in inferring too much from this for our pass - through estimates, but with renewed currency weakness in recent months it does warn us against complacency. various factors beyond a credit rating review present themselves as risks to the currency, and there are even some,

the deterioration in inflation expectations was also reflected in the increase in the breakeven inflation rates, measured by the spreads between the yields on south african cpi inflation - linked bonds and conventional nominal bonds of the same maturity. if the deterioration in inflation expectations were to continue, it would be a cause for concern given the critical role of expectations in the price and wage formation process. the economy has continued to grow at a robust pace, with quarter - on - quarter annualised real gdp growth accelerating from 3, 5 per cent in the first quarter of 2005 to 4, 8 per cent in the second quarter. this acceleration was attributed in part to the strong increase in the real value added by the manufacturing sector, which appears to have recovered from the contraction in the first quarter. the utilisation of production capacity in manufacturing, having fallen back in the previous two quarters, picked up again in the second quarter of 2005. the physical volume of manufacturing production continued on an upward trend in the third quarter and the most recent value of the investec / ber purchasing manager's index ( pmi ) also indicates that the recovery in this sector has continued, although at a more moderate pace. most other sectors have also remained buoyant and the composite leading business cycle indicator shows a favourable growth outlook. this positive growth performance had a positive effect on employment. according to the quarterly employment statistics survey, formal non - agricultural employment increased at an annualised quarteron - quarter rate of 7, 6 per cent in the second quarter of this year. over the past year this reflects an increase of 84, 000 employees. domestic demand shows few signs of significant moderation and all components of final demand grew at a healthy rate in the second quarter. new motor vehicle sales reached new record highs in september, although there was a moderate slowdown in the growth of motor vehicle sales which increased by 25, 3 per cent over the year. the strong domestic demand has been underpinned by low nominal interest rates, higher real incomes and increases in asset prices. share prices on the jse limited, for example, reached new record highs, and since the previous mpc meeting the all - share price index increased by 4 per cent. the vigorous demand was financed in part by increased borrowing, and the household debt ratio continued to rise in the second quarter. household debt as a percentage of disposable income rose from 60 per cent in the first quarter to 62 per cent in the second quarter of 2005. however, because of