about 18 months, the shape of the south african yield curve has been subject to fairly significant changes. from mid - april to august last year, when south africa was affected by the global emerging markets crisis, the slope of the yield curve was negative ; it changed from a slight to a fairly steep inversion. tight monetary conditions caused yields on short - dated bonds to rise more than yields on long - dated bonds. the overall level of the curve rose, reflecting heightened uncertainties about the future direction of financial policies, nervousness about investment in emerging markets and an upward adjustment of expectations about future inflation. the financial markets settled down gradually in the last three months of 1998 and yields declined when monetary conditions became easier as the exchange rate of the rand improved. from march this year, short - term yields declined to levels below those of long - term yields and the yield curve assumed a positive slope which subsequently steepened. as i have indicated above, it is difficult to read unambiguous signals from these changes in the shape of the yield curve. nevertheless, these shifts have been noted by the reserve bank, as have the frequent comments on the topic of the yield curve by the south african investment community. last year, when the slope of the yield curve was inverted, some analysts argued that the curve was signalling a sharp slowdown in economic activity. now that the yield curve is positive and steep, some economists are predicting a significant acceleration in economic activity. conclusion empirical studies have found that the yield curve is a good predictor of growth in non - agricultural gross domestic product. so, the recent shifts in the shape of the yield curve appear to confirm what we all sense - the economy has been in a downswing, but the turning point seems to have been reached with the recovery set to gain momentum. the reserve bank does not release its forecasts on the economy, but i can mention that forecasts that we have seen of economic growth of the order of magnitude of 3 % or so in the millenium year are not out of line. it would be difficult to read more into the signals coming from the financial markets at the moment. as a general rule, we also have to bear in mind that financial markets are not always right, and that rapid adjustments sometimes have to take place when expectations turn out to be wrong. be that as it may, the signals from the financial markets form part of the mix of factors to which the central bank pays regular attention. but not only does the reserve bank look

inflation expectations rise, interest rates should rise to control demand and inflation. our approach : we kept interest rates stable ; the repo rate remained at 7 %. this approach was controversial and contrary to the mainstream opinion of economists in the czech republic. this strategy was based on two main arguments : ( 1 ) we concluded that inflation expectations are adaptive, and therefore ex ante real rates would rise once inflation falls. we expected inflation would peak soon, as supply shocks were not repeated and inflation momentum was declining. ( 2 ) we observed a sharp decline in household consumption, a contraction in lending and a slowdown in money supply growth ( m2 ). expected and perceived inflation are highly correlated expected inflation is closely related to perceived inflation, with correlation coefficients ranging from 0. 4 to 0. 74 in different years. this suggests that inflation expectations were / are adaptive. in addition, they are not a reliable predictor of future inflation. consumption was falling despite elevated inflation expectations we carefully analysed consumption trends, which typically reflect demand pressures in the economy. despite high inflation expectations, consumption fell sharply. household consumption across eu countries ( index, 2019 = 100 ) czech republic source : eurostat this contradicts economic theory : higher inflation expectations ⇒ people consume more now because they expect prices to rise in the future household consumption fell sharply for the following reasons : § § a sharp decline in real disposable income high savings rates, influenced by economic uncertainty ( precautionary savings ) and restrictive monetary policy our approach to monetary policy in times of elevated inflation expectations to summarise our strategy for taming inflation : we decided to keep nominal interest rates stable at 7 % from july 2022 to december 2023. we focused on maintaining a strong exchange rate ( through verbal intervention ), which reached an all - time high against the euro in spring 2023, making imports cheaper. in addition, the strong exchange rate tightened monetary conditions for domestic exporters who had taken on loans in euros. inflation peaked in october 2022. inflation expectations also started to fall ( due to their adaptive nature ) and ex ante real interest rates started to rise, although nominal rates were stable. together, positive real interest rates and the exchange rate resulted in the tightest monetary conditions. lending activity fell sharply and money supply ( m2 ) eased. the monetary overhang disappeared over time. we also focused on communication : § we emphasised that inflation momentum was declining, although annual inflation was still high1 for example, https :