/ swansong. html ). bis central bankers ’ speeches let me remind you that the rand has depreciated by 16 per cent against the dollar so far this year. we have raised our policy rate by 100 basis points over an 18 - month period. in 1998, before the adoption of inflation targeting, the rand also depreciated by 16 per cent and we hiked rates by 690 basis points in a period of six months. lower pass - through from the depreciation to inflation has also helped to moderate potential policy responses. of course, floating exchange rates are dangerous if domestic borrowers have run up large, unhedged foreign - currency debts. where this is the case, the monetary authority may end up facing only bad choices. one is to use foreign currency to prop up the domestic currency to protect the economy, but this has clear limits and typically fails. the alternative is to step back and let sectors of the economy adjust on their own to the new currency level, implying much higher financing costs. the clear differentiator for south africa against many other emerging markets is that this particular policy dilemma doesn ’ t feature in our decision - making process. renouncing the “ forward book ” and allowing the “ fear of floating ” to wear off over time has limited the extent of foreign - currency borrowing, encouraging the development of our own capital markets and reducing a major risk for non - resident investors in rand assets. 2 when a country adopts a floating exchange rate, the reasons for holding foreign reserves also change. the goal is no longer managing the value of the currency. instead, reserves serve to bolster the national balance sheet, reassuring investors that the country has access to safe, liquid resources even in extreme situations. the use of reserves is therefore very different. the reserves provide insurance, a guarantee that markets will be able to price exchange rates. the fact that emerging markets have accumulated many more substantial reserves than they held, for instance, in the 1990s or early 2000s, suggests that markets will be able to function in more orderly ways, and that large, long - term investors will feel comfortable trading in those markets. monetary policy the exchange - rate policy fits within the broader policy of inflation targeting. inflation targeting provided us with a policy goal more realistic than the previous eclectic approach to policy, because we could hit it. that goal was also more meaningful for citizens, because we could focus on protecting the buying power of regular consumers in domestic markets – as opposed to, say

rates in both the third quarter of 2020 and 2021 as a whole. but they can be misleading. in level terms, our model only expects real gdp to gradually converge back towards pre - covid - 19 levels. at the time of the september mpc meeting, the quarterly projection model ( qpm ) pointed to a large output gap that will only gradually narrow over the remainder of the forecasting period and remain negative even in 2022. the combination of ongoing economic slack, an undervalued real effective exchange rate and a recent decline in medium - term inflation expectations suggest that inflation should not be a problem for the next two years or so. the qpm projects that both headline and core inflation rates will remain largely within the lower half of the target until the end of 2022, with the exception of a short - lived spike in the headline inflation rate in the second quarter of next year as a low base distorts energy price inflation. baring materialisation of upside risks, this benign inflation outlook should allow the sarb to maintain an accommodative stance for most of the coming two years, and only withdraw stimulus in a gradual fashion, as the output gap slowly closes. indeed, the latest qpm projections are consistent with a rise in the policy rate to 4. 0 % by the end of 2021 and 5. 0 % in 2021, which would still be 100 basis points below the average of the past decade. 5. can there be a new paradigm in the long run? in summary, there appears to be a growing consensus – both among forecasters and policymakers – that the interest rate cycle in the next couple of years, both globally and in south africa, is going to be one of gradual normalisation. but towards which levels are interest rates going to normalise, and what is going to be their average over the longer term – say, a horizon of five years or longer? few economists presently seem willing to make forecasts over such a horizon, at a time when it is not yet clear how long the pandemic will be with us. will the past few decades ’ trends towards lower equilibrium interest rates persist or, on the contrary, will covid - 19 usher in structural changes that are consistent with higher interest rates over time? economic theory tells us that equilibrium interest rates should reflect potential real gdp growth, inflation expectations and a risk premium that varies with the term of the loan and the creditworthiness of the borrower. the outlook for all