unenviable and difficult - to - solve combination of little growth, high inflation, and growing unemployment. we have to do better. thinking through the conditions we face and the alternatives to them helps us to envision a reform agenda. food prices i ’ ll start with food prices, the factor over which we have the least amount of influence. as you know, south africa has been suffering from a particularly severe drought. the result has been double - digit food price inflation in 2016. this is adding about 1, 5 percentage points to inflation, which is enough to push headline inflation outside the 3 – 6 per cent target range. most of the impact this year is coming from higher prices for bread and cereals as well as fruit and vegetables. a little later this year, we expect meat prices to rise more strongly and keep food inflation relatively high, even if the drought abates. the reason for this is that gross domestic product. bis central bankers ’ speeches farmers have responded to water shortages by selling animals for slaughter and are likely to withhold supply while they rebuild their stocks. accordingly, we expect food prices to come down quite slowly, even if we do get enough rain this year. higher food prices pose an interesting policy problem. they are a classic supply shock. more expensive food tends to put downward pressure on other prices because it reduces buying power and subdues demand. if this helps to check price increases, and if inflation expectations are already well anchored within the target range, then policymakers can be confident that any inflation increase will be temporary. policy can mostly ignore these kinds of temporary shocks. but if those conditions are missing – if the initial shock generates increases in the prices of other products and factors – then a policy response may be required. to put it in another way, a pebble can start an avalanche. if you ’ ve already got all the other conditions for an avalanche, you need to worry about pebbles. the exchange rate the exchange rate of the rand is another important driver of, and risk to, the inflation outlook. it has been highly volatile in recent months, reflecting rapid changes in the world economy and in south africa. as such, i would like to discuss it in some detail. the rand has been on a depreciating trend since early 2011. it reached the high point of r6, 63 to the us 2 dollar in december 2010 and then commenced a long slide all the way to r16, 87 to the dollar in mid - january of

trends. for that reason, the federal open market committee, at its march 18 meeting, refrained from making a determination about the balance of risks with respect to its long - run goals of price stability and sustainable economic growth. at the same time, we stepped up our surveillance of economic developments. as part of that surveillance, we receive virtually continuous information from commodity and financial markets. the price of crude oil is now well below its peak of early march, as the potential for serious supply disruptions in world oil markets has diminished. broad equity indexes remain well above their lows of mid - march and have been boosted most recently by incoming information on first - quarter earnings that market participants appear to view as generally positive. in contrast, six weeks after the beginning of the war, we have only limited readings on broader economic conditions, and that information has been mixed. households appear to have become somewhat less apprehensive about the economic outlook in recent weeks, though reports from businesses have not exhibited a similar improvement in tone. consistent with this, the persistent high level of new claims for unemployment insurance suggests that firms may still be finding it possible to meet their customers'tepid increases in demand with a leaner workforce. going forward, some further unwinding of the economic tensions that have been associated with the situation in iraq seems likely. as that occurs, the fundamental trends shaping the economic outlook should emerge more clearly. as i indicated when i met with you earlier this year, i continue to believe the economy is positioned to expand at a noticeably better pace than it has during the past year, though the timing and the extent of that improvement remains uncertain. fundamentally, the long - run growth potential of the economy remains solid. and the enhanced flexibility inherent in that trend imparts resilience against shocks of the kinds that we have experienced in the past few years. unfortunately, the future path of the economy is likely to come into sharper focus only gradually. in the interim, we need to remain mindful of the possibility that lingering business caution could be an impediment to improved economic performance. as you may know, the consensus of economic forecasters is that a material rebound in economic activity will develop in the second half of this year, and certainly a number of elements should be working in that direction. the recent improvements in financial markets that i noted earlier, if maintained, would seem to suggest a turnaround in capital spending. in this regard, the ongoing decline in risk spreads in corporate