to various alternative exchange rate outcomes. administered prices, apart from petrol, are generally fairly predictable, particularly where multi - year price determinations exist, as in the case of electricity tariffs. however, the recent application by eskom for a significant tariff review has increased the upside risk to the forecast. while we would not be surprised if some of the eskom request is acceded to, the quantum and timing is uncertain. given these uncertainties, the mpc decided to assign a higher upside risk to the forecast, and wait for the outcome of the nersa decision, due at the end of june, before changing the electricity price assumption. but in the meantime, we have analysed the impact of a number of scenarios on the inflation forecast. a scenario where the full 25 percent increase is granted to eskom would increase inflation over a year by about 0, 5 percentage points. perhaps the most contentious assumption is that of the policy interest rate. there is no unanimity among central banks as to how to deal with this issue. broadly, there are four different approaches. the first approach is to assume an unchanged policy rate over the forecast period. while this allows us to assess the implications for inflation of an unchanged policy stance, it has the drawback that it is unrealistic during periods of regular changes to the policy rate. the second approach allows for an endogenously determined interest rate path - one that would be consistent with achieving the inflation target over the forecast period. a third approach would be to incorporate the mpc ’ s subjective view of the interest rate path over the forecast period. this approach is also used as a means to provide forward guidance to the market, and has been adopted for some time in some countries including new zealand, norway and sweden. however, there is some risk that the public interprets this as an unconditional commitment to a particular interest rate path. a look at the so - called fed “ dots ” ( which represent the expectations of individual fomc members of future policy rates ) reveals a fairly wide dispersion of views among fomc members, but also shows how these views can change from meeting to meeting. similarly, the new zealand experience with publishing a forward path shows how significantly the expected path can change between meetings. this has led charles goodhart to argue that forward guidance of this nature may be more useful over short periods than over longer time horizons. bis central bankers ’ speeches the fourth approach is to adopt an ex

forecast trajectory, as we have to take a view of the behaviour of these variables over a two to three year time horizon. given the importance of the assumptions, a lot of time is spent deciding on them, and these discussions are an integral part of the mpc process. in fact, it is through the assumptions that the mpc members take ownership of the forecast, by making the final decision about the assumptions. to briefly describe the process : the modelling team, in conjunction with the various units in the bank, will analyse the relevant data, and bring proposals to a meeting with the mpc members. each assumption is then discussed and the reasons interrogated, and where deemed appropriate, the mpc members may require a change in the assumptions. of course it is possible that mpc members may have differing views. under such circumstances the majority view will prevail, but such differences will ultimately be reflected in the balance of risks to the forecast. our assumptions are benchmarked against various external forecasts. for example, our assumption of world growth is based to a large extent on our trading partner growth forecasts generated by the imf. these forecasts are then used to derive a global growth assumption weighted by the shares of these countries in south africa ’ s international trade. our assumption of government consumption expenditure is based on national treasury budget projections. the international oil price assumption is more challenging. some central banks simply use the prevailing futures prices, while recognising the shortcomings of this approach. apart from trying to get an understanding of the oil market dynamics, we also look at the forecasts of various oil analysts and institutions in order to get an idea of the consensus view, and we benchmark our decision against that. however, the divergence between the highest and lowest forecasts is often quite wide, particularly during periods of oil price volatility, reflecting the high degree of uncertainty in the market. often the assumptions change marginally or not at all. but the challenge emerges when we have to take a view on variables during periods of high volatility. for example, between 2011 and 2014, the international oil price was relatively stable, and our assumptions changed marginally, if at all, from meeting to meeting. during the second half of 2014, very few analysts expected prices to fall as much as they did. indeed, during june of that year, geopolitical risks were posing an upside risk to these prices. as prices began to decline from august, we