inflation effects. if inflation is higher due to these shocks, but inflation expectations don ’ t move and broader prices and wages don ’ t accelerate, then shocks will have only temporary consequences and we can afford to look through them. if the consequences are that inflation will deviate from the target in a more permanent way, however, then policy should respond. of course, it is difficult to determine if shocks will be permanent. we have forecasts and surveys to help guide our judgement, but these are imperfect tools. furthermore, by the time you have firm proof of second round effects, the policy response is sure to catch out economic agents that have already increased prices, causing economic dislocation. this implies that we need to take into consideration the expected second round price effects of shocks. in late 2015 and early 2016, policy was tightened. we were experiencing large and simultaneous price shocks – a major drought and sustained depreciation. inflation expectations were already close to or above 6 %, and core inflation was over 5 % and climbing. so there was minimal room for error. the inflation forecast showed a protracted breach of the target range. it was therefore likely that without a policy response, inflation would have shifted outside the target range in a more sustained way. the gradual policy adjustments helped prevent this outcome, while recognizing the relatively weak economic environment. we have not had to tighten policy sharply to achieve high real interest rates, as has been necessary in countries such as brazil, russia, ghana and zambia. all this is in the past. the rate hikes from late 2015 and early 2016 are only beginning to affect the economy now. those hikes help explain why inflation is returning to target. any new decisions will shape economic outcomes in about one to two years ’ time. we are therefore focussed on the outlook for late 2017 and 2018. we see the shocks of 2016 dissipating. food price inflation is expected to slow from the first quarter of next year as weather conditions normalise. the exchange rate has recovered some ground, and although its volatility reminds us how rapidly these gains could unwind, the rand has appreciated roughly 15 % against the us dollar from january ’ s lows. accordingly, our forecasts show inflation reaching 5. 5 % by the end of 2018. the mpc noted in the last two policy statements that if these forecasts prove durable, the end of the hiking cycle may be close. one of the biggest questions is over inflation expectations, which remain clustered around

the outlook for monetary policy address by lesetja kganyago, governor of the south african reserve bank at the south african summer macro conference 2016 johannesburg 25 november 2016 over the past five years or so, emerging markets got used to bad news. growth has been slowing, and growth forecasts have been marked down repeatedly. for a number of countries – particularly commodity exporters and countries with substantial external financing needs – inflation has also been accelerating. from the vantage point of late 2016, however, it seems possible we are at a turning point. in south africa, for instance, we see inflation returning to target in early 2017 and then staying within the target range throughout the forecast period. growth is expected to recover slowly from 2016 lows, and our growth forecasts have lately been revised up slightly, breaking a multi - year trend of downward revisions. furthermore, the rand may just about end the year stronger than it started, for the first time since 2010. in the late 2000s, and in the immediate aftermath of the global financial crisis, many emerging markets probably got more credit than they deserved for strong economic outcomes. now, on the other side of the cycle, the pessimism may be overdone. indeed, at the moment it is the advanced economies which have enjoyed the strongest recoveries – specifically the united states and the united kingdom – that now seem less robust, given political surprises and abrupt reversals in growth forecasts. by contrast, a number of major emerging markets are doing, if not better, at least less badly. let me set out some tentative reflections on our most recent global shock, the potential for a shift in us macroeconomic policy. let me stress that we are aware of the risk, and considerable time was spent at our mpc meeting this week discussing the issue. the basic idea is for a shift from fiscal consolidation with accommodative monetary policy to fiscal expansion with tighter monetary policy. this new combination will result in investment shifting out of bonds and into equities, with repercussions for both asset prices and currencies, and considerable volatility in the near term. the cost of financing debt has risen, and this will place pressure on overstretched economies, at least until we see whether the shift results in better real economic growth outcomes. but that outcome will remain unclear for some time. stronger us and global growth rates could entail improvements down the line in emerging market exports and commodity prices, and an improvement in south africa ’