continued to be characterised by heightened uncertainty. while the external environment has had a more dominant influence on the outlook, domestic factors also played a role. headline inflation is now expected to average 4. 8 % in 2018 ( down from 4. 9 % ) before increasing to 5. 6 % in 2019 and decreasing again to 5. 4 % in 2020 ( up from 5. 2 % in both years ). the forecast for core inflation is expected to average 4. 6 % in 2018 ( up from 4. 5 % ), 5. 5 % in 2019, and 5. 3 % in 2020 ( up from 5. 1 % in both years ). although the forecasts suggest that inflation outcomes will remain within the inflation target range, the mpc is concerned that they are drifting further away from the midpoint of the target band. the mpc deemed the key risks to the inflation outlook to be higher oil prices, a more depreciated exchange rate, and higher electricity prices. although oil prices have retreated from the recent high levels of around usd80 per barrel, they are expected page 10 of 12 to still remain at relatively elevated levels over the forecast period. together with the depreciation of the domestic currency, upside risks to domestic fuel prices and ultimately to inflation remain. the nominal effective exchange rate of the rand has depreciated by almost 9 % and exhibited increased volatility from the first quarter of 2018 to the second quarter. the increased volatility resulted from a deterioration in sentiment towards emerging markets, owing to the combined headwinds of tightening financial conditions, weakening economic growth, and rising trade tensions, which resulted in capital outflows. the rand is likely to continue to be vulnerable to these developments. in addition, electricity prices continue to pose a further upside risk given the uncertainty around the speed at which eskom will adjust electricity tariffs. should these risks materialise, it may become necessary to adjust monetary policy settings in the future to ensure that inflation remains more comfortably inside the target range and closer to the midpoint, and to ensure that inflation expectations are anchored towards the midpoint of the target range. the mpc will not hesitate to act when deemed appropriate. however, in line with flexible inflation targeting, the mpc will also continue to be careful not to overreact to initial price pressures and be guided by its assessment of second round effects of any price pressures, which could contribute to inflation moving too far away from the mid - point of the range

are not captured well in methodologies required by the current rule specifying a ten - day holding period and a 99 percent confidence interval. the inability of var calculations to adequately measure the risks of certain traded positions may give rise to arbitrage opportunities between the banking book and the trading book because of the lower capital charge that may be afforded trading positions under a var approach that is not optimally risksensitive. the u. s. banking agencies are in the process of developing a notice of proposed rulemaking to implement the market risk revisions in the united states. these revisions will apply to those banks with significant trading activity, regardless of their basel ii status. bridging the gap between regulatory capital requirements and internal bank practice with basel ii, u. s. supervisors are attempting to use the internal risk - measurement and - management information produced by large complex institutions to manage their own risks in such a way as to augment the risk sensitivity and overall meaningfulness of minimum regulatory capital measures. basel ii, by tying regulatory capital calculations to bank - generated inputs, offers greater transparency about risk - measurement and management practices that stand behind the inputs provided by banks and exactly how they are calculated. supervisors, through their analysis of bank inputs to basel ii, will develop an even better assessment of institutions ’ risk - measurement and risk - management practices. furthermore, the added transparency in pillar 3 disclosures is expected to give market participants a better understanding of an institution ’ s risks and its ability to manage them. of course, we understand that the extent that internal inputs from bankers can be used in regulatory capital requirements is limited, for a variety of reasons. today ’ s banks have highly customized models for running their businesses, which of course is entirely appropriate. but, as supervisors, we need to ensure adequacy and enforceability of our minimum regulatory requirements and maintain some consistency across banks. naturally, as we seek to develop a common framework that will work for large complex banks globally, we recognize an inherent tension between our regulatory rules and internal bank practice. we are working to strike the right balance to achieve our goals without making basel ii purely a compliance exercise and creating undue burden. need for strong capital basel ii is intended to improve regulatory capital requirements, especially for large complex organizations, through greater risk sensitivity of regulatory capital and improved linkage to banks ’ actual capital risk management. that is why we have chosen to adopt only the most advanced options for credit risk and operational risk minimum regulatory capital calculations in the united states