an address by daniel mminele, deputy governor of the south african reserve bank, at the central banking seminar of the federal reserve bank of new york new york 16 october 2017 economic and monetary policy developments in south africa introduction ladies and gentlemen, good afternoon. it is my great pleasure to address this distinguished audience of fellow central bankers as we gather here in new york city to compare the current economic and financial developments across the major regions and to discuss the conduct of monetary policy in a world that finds itself in a transition. for many of the previous years, as we gathered for the annual meetings of the international monetary fund and the world bank, we had to discuss the reasons for the continued disappointing performance of global growth, and the most appropriate role that monetary policy could play in contributing to remedying the shortfalls. this year, i am pleased to say, the outlook is finally looking somewhat promising : global economic growth, especially in the advanced economies, is gathering some momentum, is generally stronger than most observers expected a year ago, and looks sustainable, even if medium - term risks, which need tackling to safeguard these encouraging developments, cannot be ignored. page 1 of 8 as much as these developments are welcomed by the emerging economies, some of which have struggled with sub - par growth in recent years, there are some accompanying challenges. for example, stronger economic growth will continue to reduce the degree of economic slack in the advanced economies, calling for ongoing monetary policy normalization and, eventually, higher real interest rates across the world. for the emerging economies that have become used to elevated capital inflows of late, this may force unpopular policy adjustments. my remarks today will focus on the south african experience and how our monetary policy is negotiating the present challenges of low growth, inflation risks, and a benign yet uncertain global environment. the dilemma of slowing growth and stubborn inflation in its conduct of monetary policy, the south african reserve bank ( sarb ) has faced a growing dilemma in recent years : that of slowing economic growth coupled with inflation that is stubbornly rigid above the midpoint of its 3 - 6 % target range. following the short - lived rebound in the aftermath of the global financial crisis, which saw real gdp1 expand by about 3 % in both 2010 and 2011, the economy [UNK] s growth rate has gradually slowed, reaching a low of 0. 3 % in 2016. the average growth of 1. 6 % in the past five years is a far cry from the 4. 7 % seen in the

decided to keep the policy rate unchanged at its september meeting. this does not prejudge any future moves. rather, because of the elevated level of uncertainty we are currently facing, the mpc feels a particularly strong need to reassess the balance of risks at every meeting. consequently, monetary policy decisions, now more than ever, have to be data - dependent. the most recent decision of the mpc appeared to surprise domestic money markets somewhat, as they had come to discount a 25 basis points rate cut in the wake of the july move. we prefer not to surprise markets. in fact, we see policy transparency and consistency as crucial in ensuring an effective transmission of rate decisions to the economy. yet in a fluid environment, where even small changes in the balance of risks can tip the policy scales one way or another, it is not possible to systematically come up with fully predictable policy decisions – just as it is not possible, in such an environment, for the mpc to give the kind of forward guidance that some call for. if anything, domestic financial market indicators seem to broadly echo the sarb [UNK] s view that the uncertain environment is forcing a cautious approach to policy. thus, forward rate agreements only discount a short and shallow easing cycle while the yield curve is positively sloped – a sign that investors are cognisant of the upside risks to inflation, and therefore to policy rates, in the medium to long term. conclusion – the continued relevance of the inflation target range the challenges that south africa has had to face over the past few years – in particular the combination of slow growth and relatively high inflation – may have led some observers to question whether the current inflation target range remains page 7 of 8 relevant for the country at this stage. in my view, raising or even contemplating abandoning the inflation target band would be a misguided approach. both economic theory and historical experience show that whenever the price and wage formation process is rigid and price expectations are adaptive rather than well anchored, the cost of negative shocks tends to be higher and longer - lasting in real economic terms. south africa [UNK] s own experience of the most recent global financial crisis, which saw the country suffer a relatively high number of job losses, illustrates the merit of such a strong and credible price anchor. in fact, many emerging economies, including those at a similar level of development as south africa, have enjoyed both stronger economic growth as well as lower and more stable inflation since introducing inflation targets. this observation has continued to apply since the