ignoring growth and employment, as great policy thinkers like stanley fischer have pointed out. 10 there is always a balancing act. as you know, a balance rests on a fulcrum, which is the central point around which balance can be achieved. in monetary policy, this fulcrum is another one of those unobserved concepts, like potential growth ; it is called the neutral rate. the neutral rate is the interest rate that neither speeds up nor slows down the economy ; it is the level at which the policy rate will settle when inflation is at target and output is at potential. this is a concept many of our close watchers have questions about. 9 these data are not seasonally adjusted. regardless of the exact quarter used, this series shows a clear and sustained downward shift in formal, non - agricultural employment since the onset of covid19. the quarterly employment survey ( qes ) is likely to be a more reliable indicator of changes in formal sector employment than the quarterly labour force survey ( qlfs ). 10 speech by stanley fischer, ‘ central bank independence ’, 9 november 2015. https : / / www. bis. org / review / r151109c. htm : “ in practice, i doubt that any central bank targets inflation to the exclusion of all other outcomes. for example, the bundesbank was generally thought to have a very strict focus on inflation in the years in which it had an independent monetary policy before the founding of the european central bank. but researchers who have studied the bundesbank's policies of that period have concluded that it likely responded to deviations from target of both expected inflation and output growth. ” in south africa, we estimate this neutral rate to be 7 % over time, 11 of which 4. 5 % is compensation for inflation and 2. 5 % is the so - called neutral real interest rate ‒ the rate excluding inflation ‒ which economists abbreviate as r - star. in turn, that 2. 5 % is made up of half a percentage point which reflects the global real rate, which we derive from the longer - run real policy rate of the us, the euro area and japan, plus 2 percentage points for the south african risk premium. as with potential growth, we cannot be sure that the neutral rate is exactly 7 %. it is an unobservable concept and our tools for measuring it are imperfect. nonetheless, a rate of around 7 % is a reasonable place to start conversations

the rand has depreciated around 6. 8 % in the year to date and by 17. 6 % over the past year against the us dollar. the rand depreciation has negated the impact of lower global energy and food costs on domestic inflation. of concern is that core inflation, which excludes the more volatile food and energy components from the consumer price index ( cpi ) basket, remains sticky. the pressure on core inflation has been mainly driven by repriced imported goods costs. but apart from higher imported goods costs, one needs to keep an eye on core services inflation. to date, services inflation has remained relatively subdued ‒ averaging around 3. 9 % in 2022. however, upside risks seem clear, especially in medical insurance as premiums move closer towards their longer - term average rates. in addition to this, the tightening rental housing market and high inflation expectations are expected to exert upside pressure on core inflation over the near term. risks to services inflation also emanate from spillover effects from higher food and fuel inflation as well as possible higher wage increases given the adaptive nature of wage settlements in our economy. ( we have already seen sharply higher wage settlements in the public sector. ) we predict that core inflation will only decline to the target midpoint in the second quarter of 2025. inflation has important distributional consequences, with the poor and those living on fixed incomes the most adversely impacted. the current inflation surge has been underpinned by high food and fuel price increases that more adversely affect the consumption baskets of poorer households. statistics south africa ( stats sa ) data show inflation for the lowest expenditure deciles ( deciles 1 and 2 ) at about 11 % in march 2023, while that for expenditure deciles 9 and 10 is around 6. 5 %. unlike high - income south africans, low - income earners and the poor more generally cannot protect their incomes from erosion due to inflation, and this results in rising income inequality in our country. this is a critical reason for the sarb ’ s constitutional mandate to protect the purchasing power of the rand, as this mandate ensures that we can continue to work towards improving and advancing the economic well - being of all south africans. looking ahead, domestic headline inflation is projected to remain elevated, returning to the target range in the third quarter of this year and averaging 6. 0 % for the year. a more pronounced moderation in inflationary pressures is only expected in the latter years of