term upside risks to the inflation outlook, the sarb felt that it was appropriate to act against such risks, especially in light of policy normalisation in advanced economies – which would most likely imply a higher neutral real interest rate for a small and open economy like south africa ’ s. hence, in november 2018, the monetary policy committee ( mpc ) decided to raise the repurchase rate ( repo rate ) by 25 basis points, reversing the cut that had been implemented in march of the same year. by early 2019 though, inflation performance was more benign than anticipated and the risks to the inflation outlook had eased sufficiently enough for the sarb to maintain an unchanged policy stance. page - 4 - of 9 at the time of its latest meeting held on 18 july 2019, the mpc felt comfortable enough with the recent downward trend in inflation outcomes, as well as the ongoing decline in inflation expectations, to lower the repo rate by 25 basis points. overall, when looking back at the last few years, it is important to acknowledge the progress that has been made in reducing inflation volatility in south africa, including in response to exchange rate shifts, and how this has allowed for a better anchoring of inflation expectations and, in turn, how this has also limited the need for sharp monetary adjustments. since 2016, surveyed inflation expectations have declined by 100 basis points. a more stable and predictable path of interest rates will enhance the environment for sustained economic growth, as the experience of many advanced economies and, increasingly, also the emerging economies has shown. the persistence of such gains is, however, not certain, meaning that the mpc will continue to exercise vigilance in the years ahead. financial stability with the implementation of the financial sector regulation act 9 of 2017 ( fsr act ) in april last year, the sarb was provided with an explicit statutory mandate to protect and enhance financial stability. the fsr act further requires the sarb to monitor and keep under review the strengths and weaknesses of the financial system, as well as any risks to financial stability. to this end, the sarb has developed frameworks for identifying, monitoring and mitigating systemic risks. on the whole, the sarb currently assesses the financial sector to be strong and stable. nevertheless, potential vulnerabilities exist, as we have observed a few emerging trends over the past year, particularly in the banking sector. while south african banks remain adequately capitalised and profitable, the implementation of the new

moderate increase over the forecast period, there may be some upside risk to this. at this stage, we see the main risk to the domestic petrol price coming from the exchange rate and higher fuel levies. demand pressures are expected to remain relatively muted. they may have contributed to the more moderate trend of core inflation in 2017. this is also reflected in the persistence of a negative output gap despite potential output growth of only 1. 1 % for this year rising to only 1. 3 % by 2019. we do not see inflation pressures coming from the demand side for some time, although global growth is expected to close the global output gap in 2018 – and this will also further narrow our own gap. household consumption expenditure growth is expected to remain relatively muted, at page 7 of 9 around 1 % per annum, over the forecast period. this is against a backdrop of weak growth in credit extension to households, low levels of consumer confidence, higher tax burdens, and the absence of significant wealth effects. by contrast, some support to consumption expenditure is expected to come from lower inflation and real, albeit modest, wage growth. wage pressures remain a concern, as nominal wage settlements continue to contribute to the persistence of inflation at higher levels. overall, we remain concerned about the weak economic growth outlook. the sarb ’ s forecast for gdp growth for 2017 has been revised upwards, albeit marginally, from 0. 5 % to 0. 6 % in september, while the forecasts for 2018 and 2019 have remained unchanged at 1. 2 % and 1. 5 % respectively. the risks were assessed to be slightly on the downside. of major concern is the negative growth in gross fixed capital formation, particularly by the private sector. growth in private - sector fixed capital formation has been negative for six consecutive quarters. as i mentioned earlier, restoring confidence will go a long way in getting us on a recovery path. without growth, we will not be able to make any inroads into our most pressing problem of high unemployment, currently at over 27 %. so, what can monetary policy do to help in this situation? it is clear that the problems the economy faces are mostly of a structural nature – not something that can be solved by monetary policy alone. in addition, recent surveys conducted by the bureau for economic research also indicate that the uncertain political environment is the single biggest factor weighing on business confidence, and therefore on investment. research conducted at the sarb indicates that the confidence factor shaved off at least one percentage