. za ) monetary policy committee statement, 19 may 2016 ( www. resbank. co. za ) quarterly labour force survey, statistics south africa, pretoria, may 2016 bis central bankers ’ speeches monetary policy allow me to now turn to monetary policy. currently, the policy dilemma is one of trying to address the deterioration in the inflation outlook against the background of a weakening growth outlook. inflation is currently outside the inflation target range, and the most recent forecasts indicate that it will not return to within the target band until the second half of 2017. inflationary pressures are currently underpinned by supply - side shocks, mainly related to exchange rate and food price movements. exchange rate depreciation, or rand weakness, is an issue that most of us are innately aware of. it affects every south african through a number of direct and indirect channels. consumers immediately feel the effects of depreciation at the petrol pumps and, later, through ‘ first - round ’ impacts on imported goods. however, as the sarb ’ s monetary policy committee ( mpc ) has stated on numerous occasions, flexible inflation targeting allows monetary policy to see through these so - called ‘ first - round ’ inflationary effects. the greater danger is a self - enforcing inflationary process that is jump - started by these initial effects : the so - called ‘ second - round ’ inflationary impacts. 11 the sarb is concerned about the rising inflation expectations, and for good reason : these can become a self - fulfilling prophecy. essentially, this implies that rational agents will demand compensation in line with their inflation expectations to protect their purchasing power, resulting in rises in input costs and eventually in the general price level. this inflationary process is in some respects similar to newton ’ s first law of motion : an object in motion tends to remain in motion unless an external force is applied to it. monetary policy is this external force that is required to bring down inflationary expectations from elevated levels. in order to prevent such a cycle from beginning, it is important for monetary authorities to display a commitment to keeping inflation within the target band and for agents to believe that this commitment is credible. in so doing, inflation expectations can be well anchored at levels consistent with the inflation target range, even as actual inflation temporarily exceeds it. under these circumstances, monetary policy should strive to ensure that these shocks do not result in second - round impacts and a generalised increase in prices. this was the primary motivation for the increase in the repurchase rate

promote its economic mandate of full employment and price stability. however, because there seems to be considerable interest in the income produced by the portfolio, let me touch on it briefly. given the uncertainty about how the balance sheet and interest rates may evolve, there is a wide range of outcomes for the income stream from the soma portfolio. 13 at this point, if interest rates and the balance sheet were to unfold in the manner that appears to be expected by market participants, the asset purchase programs should produce a substantial amount of cumulative income. the soma annual report for 2010 presents some projections for the portfolio income under an illustrative set of assumptions for the evolution of interest rates and the balance sheet. 14 under that projection, the portfolio produces about $ 500 billion of cumulative income over the period from 2009 to 2018, which is about $ 90 billion in excess of what we project would have been realized in the absence of asset purchases. of course, the realized stream of income could differ substantially from these projections, depending on how interest rates and the balance sheet evolve. in any event, it is worth repeating that the realized income is much less important than the economic outcomes that are achieved from the programs. conclusion i hope these comments have provided you with some insights into how the soma portfolio has been managed to date and some perspectives on its evolution going forward. in general, the federal reserve will continue to have a meaningful presence in the treasury market and in the agency debt and agency mbs markets for a number of years. however, with effective communications about potential balance sheet actions and careful implementation of any such actions by the desk, the markets should be able to adjust to the evolution of the soma portfolio without considerable problems. thank you. all soma income is remitted to treasury after paying for the operating expenses and capital needs of the federal reserve. of course, the federal reserve is being compensated for assuming this risk in the same manner as other market participants, because the assets were obtained at market prices that embed premiums for the various risks involved. our presence in the market likely reduced these risk premiums, but they appear to have remained positive on average for the assets purchased. see “ domestic open market operations during 2010 ”, a report by the markets group of the federal reserve bank of new york, march 2011. bis central bankers ’ speeches