prices alone explains more than half of the headline inflation figure. in the medium term, it is critical whether rising energy prices will increase inflation expectations and wages or change firms'pricing behaviour. energy inflation and supply chain bottlenecks alone would not lead to a sustained acceleration in inflation unless there are major second round effects, leading to a wage - price spiral. unlike in the united states, with its labour market red hot, wage inflation in the euro area has been rather moderate – until recently, that is. we have seen clear signs of acceleration in the first months of this year. that ’ s why we must be mindful of not letting inflation expectations become unanchored, which would be very damaging to price stability. this is now the single most critical factor in determining the course of monetary policy. last december, the ecb governing council started the gradual process of monetary policy normalisation. and we have been fortunate to have our renewed monetary policy strategy in place as we face the current turmoil. the ecb strategy review was a critical turning point in ecb monetary policy. it was the final step in the process of making the ecb a modern central bank since mario draghi ’ s “ whatever it takes ” speech. the ultimate reason for the strategy review was the emergence of profound structural changes in the euro area and the world economy. these include the change in the relationship between the spare capacity of the economy and inflation, the fall in natural interest rates, and sluggish productivity growth. according to the revised strategy, price stability – the primary objective of the ecb – is best maintained by aiming for 2 % inflation over the medium term. the inflation target is symmetric : the governing council considers both inflation above and below this 2 % target to be equally undesirable. the new strategy was worked out in 2020 – 21 in a disinflationary, even deflationary environment, and it serves to ensure that the economy does not get stuck in a situation of too slow inflation for a prolonged period. the governing council also stated that inflation may also be temporarily moderately above the target. the medium - term orientation of monetary policy allows for a better emphasis in decision - making on other objectives that are important for all euro area countries, such as full employment, without, of course, jeopardizing price stability. i tell you this also to illustrate how quickly the operating environment of monetary policy has changed. it was still less than a year ago, i recall, that some commentators

global growth outlook is likely to persist for some time, and we need to be mindful that the prevailing financial crisis has already lasted five years, with no end in sight, the challenges facing the domestic economy are daunting. but not all of our problems can be ascribed to these global factors. there are numerous underlying structural problems in the economy which are exacerbated, but not necessarily caused, by these global developments. in line with the weak and deteriorating global outlook, the bank has been progressively downgrading its economic growth forecasts over the past year. growth in 2012 is expected to average around 2, 7 per cent, down from 3, 1 per cent in 2011. the most recent forecast for bis central bankers ’ speeches 2013 is a growth rate of 3, 8 per cent, but the risks are seen to be on the downside. according to reuters, the market consensus forecast for 2013 is 3, 3 per cent. growth rates of this order of magnitude will not have an appreciable impact on south africa ’ s unemployment rate which currently stands at 24, 9 per cent. it is instructive that during the high growth years between 2004 – 2007, when growth averaged around 5 per cent, unemployment declined to 21, 9 per cent but this was quickly reversed following the crisisinduced recession in 2009. so if these patterns are to be repeated, we would need a number of years of significantly higher growth than we are currently expecting simply to get back to pre - crisis levels of unemployment. however, the sustainable growth rate itself is constrained by the potential output of the economy, which, in turn, is determined by capacity and other structural constraints. at a simple level that implies that if we have unemployed resources or spare capacity in the economy, output can be increased in a non - inflationary manner. research done in the bank prior to the crisis showed that the potential output growth of the economy was between 4 and 4, 5 per cent. since the crisis, that has declined to around 3, 5 per cent. this decline may have been due in part to some destruction of capacity and we also now know that growth will be constrained by the lack of adequate electricity provision until sometime next year at the earliest. i should note that this does not imply that a growth rate in excess of 3, 5 per cent would necessarily be inflationary. currently the economy still has a negative output gap, which we estimate to be around 3, 5 per cent, which is indicative