a keynote address by daniel mminele, deputy governor of the south african reserve bank, at the s & p dow jones indices south african seminar johannesburg 12 february 2019 understanding the core drivers of inflation in south africa introduction ladies and gentlemen, good morning, and thank you to s & p dow jones indices for inviting me to deliver the keynote address at this conference, which brings together a broad spectrum of investment management and other financial market professionals to discuss, among others, key drivers of south africa ’ s reinvention of itself to stimulate economic growth. the topic chosen for this address, ‘ understanding the core drivers of inflation in south africa ’, is of high relevance today – not just because of the key influence that price developments have on the economy in general, and on corporate investment decisions in particular, but also because of the growing debate, both at home and globally, about the mandate of central banks and what exactly they should be responsible for. within the context of today ’ s theme, i thought it might be useful to first provide some insight into how inflation has ended up relatively high in south africa, the challenges in bringing it lower, and how the south african reserve bank ( sarb ) sees the recent encouraging developments, and its outlook for consumer prices over the near to medium term. i will conclude my address by highlighting the sarb ’ s policy response to this inflation outlook and the risks thereto. page 1 of 9 a brief history of inflation challenges in south africa in recent years, south african consumer price inflation has regularly exceeded the median levels for both the world and large emerging markets. but this was not always the case. in the three decades or so that followed the second world war, south african inflation was largely in line with that of its main trading partners. the decoupling occurred mostly from the 1980s onwards, when central banks – in the advanced world at first, though later also in emerging markets – took effective steps to root out high inflation. by contrast, the 1980s saw south africa experience high and volatile inflation in an environment of growing supply constraints, disinvestment and sanctions, and a loosening of the fiscal stance by a government facing increasing pressure for political reform. the advent of democracy in 1994 saw increased focus on price stability as a necessary condition for growth and development, which is why the drafters of the constitution enshrined, in the country ’ s fundamental law, the sarb ’ s mandate of achieving and maintaining price stability in the interest of balanced and sustainable

low and stable interest rates would last influenced both the funding and investment models of many financial institutions, leading them to increase their exposure to interest risk. if higher yields for longer become the norm, many investment positions may be liquidated simultaneously, adding to asset price volatility. 7 negative spillovers from the global environment to our regional economies are not limited to financial flows. merchandise trade flows also pose a risk to emerging market and developing country growth. global trade in merchandise goods – after the postcovid - 19 rebound – appears to be in a recession phase. 8 china's shift away from infrastructure and property investment, towards more household consumption and away from infrastructure and property investment poses a challenge for commodity exporters. as a result, african exports have been contracting since the second quarter of 2023. beyond the current weakness in global export and import flows, the international trade system could suffer from geo - economic fragmentation in the medium term if geopolitical rivalries unravel the multilateral, rules - based system. rival trade blocs that engage less which each other, be it with respect to trade, foreign direct investment or technology transfers. recent research from the imf suggests that the ssa region, see ‘ policymaking in an age of shifts and breaks ’, speech by christine lagarde, president of the european central bank, at the annual economic policy symposium ‘ structural shifts in the global economy ’ organised by the federal reserve bank of kansas city in jackson hole, 25 august 2023. international monetary fund, global financial stability report, october 2023. data from the netherlands bureau for economic policy analysis show that the volume of global trade contracted by 1. 9 % year on year, on average, in the first eight months of 2023. with its broad spectrum of export destimations, could experience the most significant output losses from such fragmentation. 9 regional vulnerabilities to global challenges although the ssa region has displayed resilience to global shocks, these improvements are still fragile and insufficient to bolster the region ’ s attractiveness for external investment. first of all, inflation remains too high in many ssa economies. among the 10 largest economies in the region, six still had double - digit year - on - year inflation rates as of september. recent currency depreciation in many ssa countries ( where a large part of the consumer goods basket is imported, and where inflation expectations are often poorly anchored ) risks perpetuating high inflation, in terms triggering addition