imf expects a modest rebound in emerging market growth this year. however, it warns that the risks to this outlook are skewed to the downside due to geopolitical uncertainties, china ’ s shifting growth model, and the possibility of escalating financial market volatility. advanced economies continued on a path of recovery last year, albeit at a mixed pace. the us and the uk appear to be leading the recovery, while japan and the euro area find themselves in an earlier phase of their economic upswings. the ongoing improvement in us economic activity and employment prompted the us federal reserve ( fed ) to lift the benchmark us interest rate last december for the first time in nine years. the fed is expected to continue on a gradual path of interest rate normalization over the medium term. as publicand private - sector borrowing costs in many parts of the world are referenced off us interest rates, a rising us policy rate threatens to push up the cost of capital globally. a second symptom of the impending us hiking cycle is that it has seen the dollar strengthen substantially against most other currencies since mid - 2014. this has been driven by a flow of capital into bis central bankers ’ speeches the us and, to some extent, out of emerging markets. meanwhile, in europe and japan, central banks are aggressively easing policy in an attempt to fight off deflation and low growth. global economic growth has persistently disappointed since the financial crisis hit in 2009. this is due, in part, to high levels of indebtedness, excess capacity as well as weak fixed investment growth in many parts of the world. however, these challenges are being exacerbated by longer - term trends such as falling productivity growth, the technological displacement of jobs, and a downshift in global trade. while these trends present both opportunities and challenges, it appears as if emerging market economies are most at risk in the current environment, especially from an employment perspective. in an increasingly globalized world, it is important for south africa to improve its competitiveness so that we can grow our export base and avoid increased import penetration. domestic prospects let us turn now to an examination of the domestic economy. as governor kganyago pointed out in the statement of the monetary policy committee ( mpc ) last month, gdp growth is expected to come in at only 0, 9 per cent this year. if the forecasts of the south african reserve bank ( sarb ) are correct, economic growth

, be short - sighted of the reserve bank to overlook inflation and consider only shortterm economic growth in its decision making. instead, what we try to do is balance the need for stable economic growth and low levels of inflation. we are cognizant that the current interest rate hiking cycle will have a short - term detrimental impact on the economy. however, the cycle thus far has been gradual and shallow by historical standards. this measured approach to monetary policy tightening reflects the difficult balancing act that we currently face. the reserve bank operates within a flexible inflation - targeting framework, which allows us a degree of discretion in responding to inflation target breaches. if we expect a breach to be temporary or to be caused by an external shock, we may opt to look through such an event. an external shock could be a once - off food price increase or a depreciation of the exchange rate. in the case of such a shock, we may look past the first - round impact and act only if we see evidence of second - round effects ( that this, if the shock feeds through more broadly into inflation ). for example, in both 2012 and 2013 inflation briefly breached the 6 per cent level. the breaches were temporary, so we were able to look through them and leave interest rates on hold at that time. the inflation outlook has unfortunately deteriorated since then, which has called for higher interest rates. last month, the mpc opted to lift the repurchase rate, or repo rate, by 50 basis points. this was due to a revised inflation forecast, which sees headline inflation remaining above the 3 – 6 per cent target range throughout the forecast period. our inflation forecast was revised higher in january due to the multiple supply - side shocks that i referred to earlier. while we are able to tolerate a single external shock for a limited period of time, we cannot tolerate multiple simultaneous shocks that are likely to keep inflation elevated for two years. shocks of this nature raise the risk that inflation expectations for the coming years will recalibrate to a significantly higher level. bis central bankers ’ speeches our monetary policy response going forward will depend largely on how surveyed and implied inflation expectations play out over the course of this year. we use the bureau for economic research survey of inflation expectations among trade unions, financial analysts, and business people as a guide. but a crucial indicator of implied inflation expectations is the level of actual wage settlements in the economy. wage settlements that are above inflation and productivity growth threaten to undermine