remarks by daniel mminele, deputy governor of the south african reserve bank, at the annual financial markets department cocktail function johannesburg 10 may 2018 ladies and gentlemen, good evening. it is with pleasure that i welcome you to the annual cocktail function of the financial markets department ( fmd ) of the south african reserve bank ( sarb ), which is now in its 12th year. we are greatly honoured by your presence tonight. the deal i struck with our financial markets department for moving this function from pretoria to johannesburg was that i would be allowed to speak for 90 minutes. introduction allow me in welcoming you to this event, to make some brief observations about financial market developments since we last met and to touch on what could be in store for us in the period ahead. i would also like to draw your attention to two of our initiatives that are gathering momentum, and which will require your cooperation over the next few months. i know that our views on domestic monetary policy are always of interest to financial market participants, but as we are on the eve of entering into the closed period for our next monetary policy committee meeting, which starts on 22nd may, i shall refrain from any comments today, and ask for your patience until you get our most recent take in about two weeks ’ time. the global financial markets backdrop since the last fmd cocktail function, global financial markets have had to ponder over a plethora of developments, including the strengthening synchronised global growth environment, changing perceptions around monetary policy normalisation, rising page 1 of 8 financial market volatility, threats of escalating trade conflicts, and rising geopolitical tensions. in many ways, the period since our last cocktail function to now has been one of transition ; from markets being very complacent about risks, to the current environment in which risk - sensitivity levels appear to be rising again, even against still relatively overall supportive financial conditions. the initial period was characterised by volatility being subdued across a broad range of asset classes, in certain instances with indicators touching record lows. while us interest rate futures increased to reflect expectations that the fed would hike interest rates, and also appeared to factor - in that the us treasury would issue more short - term debt, the anticipated pace of such interest rates increases was expected to follow a relatively slow and gradual profile. the other major economies were seen to be still somewhat behind the us with regard to changes to their monetary policy settings. one puzzling issue for the markets had been the

fact that even with expectations for better growth in the us, further stimulus coming from the implementation of tax reforms, both of which pointed to possible further hike by the fed, the usd was weakening. during this period of a relatively benign global environment, capital flows to emerging markets also held up rather well. we have now moved into a period where the market is adjusting to the strength of the cyclical growth momentum that has started to put upward pressure on short - term interest rates and push volatility higher. adjustments to monetary policy by way of policy rate increases and reducing the pace of asset purchases are now featuring more prominently when assessing future developments. this has already been witnessed with the 10 - year us treasury yield rising to the psychologically significant level of 3 % – a level last seen, albeit briefly, in 2013. now all market - generated paths for policy rates suggest an upward trajectory. concomitantly, the us dollar has been regaining the ground lost previously, which had seen the usd reaching a three - year low in february 2018. developments in the domestic financial markets you are all very familiar with developments in the domestic markets, which will allow me to be very brief. prior to the recent dollar strength, but subsequent to the fmd cocktail function last year, price formulation in the domestic financial markets reflected a confluence of idiosyncratic and global factors. page 2 of 8 the rand was range - bound during the second and third quarters of last year, trading between r12. 62 and r13. 95 against a steadily weakening us dollar. the benign global environment had to an extent helped shield domestic financial assets from unfavourable domestic growth developments as well as political and policy uncertainty. however, in the latter part of the year, domestic factors were more dominant and resulted in the rand depreciating to a year ’ s high of r14. 47 in november 2017, before subsequently rebounding on positive sentiment towards domestic fiscal and political developments as well as concomitant views from credit rating agencies which were positively received by the market, which included moody ’ s investor service retaining south africa ’ s sovereign credit rating at investment grade level and improving the outlook to stable from negative. a key factor in moody ’ s assessment was their reduced nervousness about south africa ’ s rising economic and fiscal risks, and higher levels of comfort with regard to efforts to restore the strength of key institutions. the strengthening rand led to a sharp decline in local bond yields, with the yield on the benchmark