forecast in may, inflation is still expected to remain above the upper end of the target range until the third quarter of 2017 – and the risks to this forecast were assessed to be on the upside. in light of our flexible inflation - targeting mandate, we needed to ask ourselves a number of questions, including : • how strong and durable would the drivers of inflation prove to be? • to what extent should we take the weak state of the economy into consideration? • to what extent would the persistence of the output gap limit the pass - through from exchange rate depreciation to domestic prices? • how big was the risk that this unusually large depreciation ( 51 per cent in nominal effective terms since the end of 2010 ) would unanchor inflation expectations? indications of a lower exchange rate pass - through to inflation have been encouraging. if we look at the core rate of inflation ( i. e. headline inflation excluding food, petrol and energy ), it has accelerated by 2, 6 percentage points since it bottomed in early 2011. by contrast, in response to the previous cycle of significant exchange rate depreciation ( 58 per cent between 2006 and 2008 ), core inflation increased by 7, 9 percentage points. this suggests that the lack of dynamism in consumer demand as well as the absence of a credit boom or of significant wealth effects seem to have limited the ability of producers and retailers to pass through cost increases to the end consumer. yet, because this reduced pass - through, which incidentally is not unique to south africa, is not yet fully understood, we cannot become complacent and assume that it has become a permanent feature of our economic landscape. the pass - through has not been constant over time ; just as it fell, it could rise again. the role of inflation expectations therefore becomes paramount. historically – in part because of the major structural changes the economy went through in the last 50 years and in part because of a long period of high and volatile inflation ( from the 1970s to the 1990s ) – price expectations in south africa appeared to be adaptive, as reflected in the behaviour of price and wage setters, be they businesses or organised labour. the introduction of inflation targeting in 2000 helped, over time, to reduce the volatility and adaptive nature of inflation expectations. expectations have, in recent years, been relatively stable, although around the upper end of the 3 – 6 per cent target range. this “ upward bias ” in expectations limits the margin of manoeu

overall net positive, there are also negatives to the decline in the oil price. a number of our export partners in africa, such as angola and nigeria ( which are oil - exporting countries ), have been severely affected by the decline in oil prices. reduced export revenues and growth in these economies will adversely affect their trade with south africa. added to this has been the generally weak global growth outlook, particularly in some of south africa ’ s major trading partners, including the eurozone and china, which also offsets the positive impact arising from the decline in oil prices. furthermore, a lower oil price may strengthen disinflationary pressures in places like the eurozone and japan, further weakening their growth prospects 1 with adverse implications for countries like south africa which are reliant on these export markets, although we are encouraged by the most recent assessment of the outlook for the eurozone and japan as contained in the april 2015 weo. on balance, for an oil - importing country like south africa, the positives of an oil price decline outweigh the negatives. however, we cannot afford to be complacent. in south africa, the risk to the inflation outlook is tilted to the upside for a variety of reasons. firstly, oil price developments are uncertain. secondly, while expectations of us monetary policy normalisation appear to have been moved out, any surprises to the contrary could increase the already high volatility in financial markets, and particularly in foreign - exchange markets. finally, the current decline in inflation rates as a result of the recent oil price movements, in effect, means that inflation outcomes in a year ’ s time will be subject to strong adverse base effects. the policy challenge is to ascertain the future path of oil price developments – this is a formidable task! it is uncertain whether the lower price levels that we are currently experiencing are transitory or permanent. put differently, could oil prices increase again as quickly as they went down? while there seems to be consensus that we would not return to the most recent peaks, unfortunately, these questions do not lend themselves to easy and clear answers. according to imf ’ s world economic outlook update, january 2015, despite substantial uncertainty about the evolution of supply and demand factors, futures markets suggest that oil prices will rebound but remain below the level of recent years. experience to date does, however, show that futures prices have been poor predictors of spot prices on the oil market. it is clear that