. the appreciation in emerging market currencies, including the rand, has been mostly driven by external factors, such as increased global liquidity, the depreciation of the usd and renewed investor - appetite for more risky assets. domestic factors, such as relatively strong macroeconomic fundamentals and wider interest rate differentials, have also played a role. these gains, unfortunately, increase the likelihood of an uneven economic recovery. whilst the monetary and fiscal authorities in south africa have at times expressed concern about the impact of the appreciated currency on the overall macroeconomic balance, sarb policy remains that of no intervention in the foreign exchange market with the objective of managing the currency. the floating exchange rate regime helped to cushion south africa from more severe effects of the global crisis. the bank will, within the broader context of policy coordination with the national treasury, continue with its strategy of accumulating foreign exchange reserves when market conditions are conducive. over the past year, reserves accumulation was constrained by the volatility in the foreign - exchange markets, the level of global risk aversion and cost considerations. more recently, conditions in the foreign exchange markets have been somewhat more favourable, allowing the bank to increase its purchases of foreign exchange in a responsible manner. 5. south africa amidst the crisis as we are all aware, south africa was not immune to the global crisis, the domestic economy contracted for three consecutive quarters. the monetary policy tightening cycle which commenced in june 2006 came to an end in june 2008. the mpc was initially more concerned about the impact of multiple supply shocks on inflation. it was only later that global developments began to have a significant impact on the economy. keeping in mind that the mpc ’ s focus is on the medium to long - term expected inflation trajectory, and that there is a lag in the reaction of inflation to interest rate changes, the significant widening in the output gap and inflation continuing its downward trend after peaking at 13, 6 per cent in august 2008, allowed for the mpc to reduce the repurchase rate by 500 basis points between december 2008 and august 2009. the contraction in economic activity and the change in the monetary policy stance impacted the domestic bond market in two ways. firstly, while monetary policy easing exerted some downward pressure on bond yields, this was counteracted by increased supply of government bonds. given the rapidly slowing economy, revenue intake was substantially lower than projected, causing an increase in the budget deficit. increased risk aversion also resulted

a bis central bankers ’ speeches sudden spurt in risk aversion. by several metrics, finally, south african equities appear increasingly expensive. but it is important to accept that the transition period on the path of policy normalisation will not always be smooth, and not to confuse the bouts of volatility that we have experienced, and which are likely to be with us for a while, with instability in our markets. monetary policy challenges monetary policy in south africa is currently facing an increasingly challenging situation, as the domestic economic growth outlook has deteriorated markedly even as inflation broke out of its target range. this deterioration is heavily influenced by supply side factors and final domestic demand has slowed in recent quarters, indicating a continued lack of demanddriven price pressures in the economy. this suggests that the current rate cycle need not match the speed and magnitude of earlier cycles. as you are aware, we entered the present rate hiking cycle in january this year when the repo rate was increased by 50 basis points to 5. 5 per cent per annum in reaction to a deteriorating inflation profile, with the bank ’ s inflation forecast suggesting that the upper band of the inflation target would be exceeded for an extended period. the most recent cpi print at 6. 6 per cent came out above expectations, which followed recent consumer and producer price data releases signalling a growing passthrough of previous rand depreciation to prices of durable and semi - durable goods. such a risky environment continues to call for vigilance by the monetary policy committee, to ensure that any pass - through of previous rand depreciation to inflation does not become permanent, that inflation expectations do not become unanchored from current levels, but in fact improve as they are uncomfortably close to the upper range of the inflation target. as indicated by the monetary policy committee, the current rate hiking cycle will need to be responsive to incoming data and information in relation to, among other factors, exchange rate developments, food price developments, labour market data and balance of payments dynamics. but the fact remains that inflation is uncomfortably high, and that risks continue to be tilted to the upside, and that interest rates will have to normalise in due course. in this complex environment communicating with the financial markets, which provide an important link in the transmission of monetary policy, becomes particularly important. central banks implement monetary policy decisions mainly by transacting in the financial markets. while the past year has clearly shown the benefits of an improved level of central bank communication about likely future