that the risk of a “ de - anchoring ” of inflation expectations, from the upper end of the 3, 0 – 6, 0 per cent target range, where they had stabilized in recent years, cannot be overlooked. furthermore, break - even inflation rates reflect elevated longer - run inflation expectations, with implied inflation rates from five - and ten - year bonds averaging 6. 5 per cent over the past year. despite weak growth and the lack of demand pressures, inflation in south africa remains elevated partly because of structural rigidities in product and labour markets. 13 product markets in south africa are highly concentrated and are characterised by high and inflexible prices, which reduces the sensitivity of corporate pricing power to the business cycle and thus adversely impacts on inflationary pressures. wage growth in many industries is not strongly correlated to productivity growth, and the shortage of skilled workers in the tertiary sector means that average salary expectations – at 7. 1 per cent for 2016 – remain above current and expected inflation. this of course has implications for core inflation and is part of the reason that it hasn ’ t slowed as much in 2015 as we would have hoped. after averaging 5. 6 per cent monetary policy review, sarb, november 2015. bis central bankers ’ speeches in 2014, core inflation is expected to have only moderated to 5. 5 per cent in 2015, which coincides with the bank ’ s forecast for this year. as the mpc has clearly noted in its statements, the currency remains a key source of risk for inflation in south africa, despite some recent evidence of weaker pass - through. rand depreciation is a major factor underpinning inflationary pressures in so far as they increase the domestic prices of imported goods. commodity price movements also lead to a negative demand shock, which serves to offset inflationary pressures somewhat. recent indications suggest, however, that the transmission of import prices to domestic prices has been more muted in south africa and other emerging markets. in our case, this could be explained by a lack of demand pressures, represented by a negative output gap, which is forecast at – 1. 8 per cent of gdp for 2015. 14 however, it is unclear as to whether this trend will continue, or if the full impact of the pass - through is merely delayed, and policy makers must thus remain vigilant. earlier in 2015, there were signs of a relatively benign path for the exchange rate, as it held up well against the yen and euro. however, as

on the agricultural sector, which may worsen in coming quarters. indeed initial crop estimates indicate that south africa will likely need to import a significant amount of grain this year. looking to the year ahead, as at november last year the bank ’ s projections for growth was 1. 5 per cent for this year and 2. 1 per cent in 2017 as electricity constraints ease, but the risks remain skewed to the downside. the slowdown in china and persistently low commodity prices are expected to have a negative impact on the mining sector, which, while contributing only 5 per cent to gdp has accounted for more than 60 per cent of south africa ’ s export revenues over the past decade. internal estimates by the reserve bank indicate that the drop in commodity prices between june and november 2015 could take a quarter of a percent off real imf weo database. global economic prospects, world bank, january 2016. bis central bankers ’ speeches gdp growth in 2016. 9 with regard to manufacturing, the barclays purchasing managers ’ index fell sharply in november from 48. 1 to 43. 3 index points – the lowest level since august 2009, suggesting a constrained outlook for the sector. furthermore, business confidence remains low, with the sacci business confidence index for december 2015 declining by 3. 1 index points to 79. 6, when compared to the month prior. the 2015 annual average of the business confidence index is at the lowest level since 1993. unsurprisingly, in light of the weak growth prospects for the south african economy, and low levels of business confidence, growth in gross fixed capital formation has remained subdued. after reaching a five - year low in 2015, private sector fixed investment growth has since picked up slightly. the sarb expects private sector fixed investment growth to reach 1. 6 per cent in 2016, from 0. 4 per cent in 2015, with electricity shortages and weak demand for commodities being among the main factors responsible for this subdued outlook. 10 on the demand side, the financial position of households remains under pressure, despite some gradual deleveraging since the global financial crisis. consumer expenditure growth remains weak as a result of a moderation in real income growth and low levels of consumer confidence. real spending on durable goods contracted in the third quarter of 2015 – the first contraction since the second quarter of 2009. credit extension to the household sector has been weak over the last few years, and is likely to remain so in the future, given the subdued growth and employment prospects south africa faces