breaches was compelling. each of them could be traced to specific supply shocks, from food or administered prices. the departures from the target were temporary. core inflation remained within the target range. inflation expectations were elevated but highly dispersed and reasonably stable. for a flexible - inflation - targeting central bank facing persistently sub - par growth, there was a robust case against responding to these price developments. but that did not make the choice free. the policy had costs. and the benefits disappointed. one of these costs was shifting to a much higher level of core inflation. when headline inflation first exceeded 6 per cent, the top end of the target range, towards the end of 2011, core inflation was at 3, 9 per cent. 5 from that point, it tracked steadily upwards to a peak of 5, 8 per cent in late 2014. it did so in line with repeated, if temporary, deviations of headline inflation from the target range. headline inflation averaged 5, 8 per cent between 2012 and 2014. in these circumstances, it is unsurprising that other, less volatile prices adjusted to that level. 6 another cost was the consolidation of inflation expectations around the very top of the target range. as i have already mentioned, average expectations have been fairly stable around the top of the target range for several years now. but focusing on a simple average conceals useful information. medium - term expectations have converged strongly over the past four years, revealing something near a consensus that south african inflation will be around 6 per cent over the longer term. this is not because of shocks, which cannot be foreseen with any clarity several years out. this is because the 6 per cent is perceived as the normal level. what of the benefits? the goal of cutting rates to historically low levels was to close the output gap as inflation was easing. growth did not accelerate ; it slowed persistently : from just over 3 per cent in 2010 and 2011 to slightly over 2 per cent in 2012 and 2013, and a mere 1, 5 per cent in 2014. very low the consolidated government balance, as a percentage of gdp, moved from a surplus of 1 per cent in 2007 / 08 to a deficit of 3, 9 per cent in 2014 / 15. over the period, total gross loan debt as a percentage of gdp rose from 26, 6 per cent in 2007 / 08 to 46, 2 per cent in 2014 / 15. core inflation is defined here as headline minus food, non - alcoholic beverages and

help to stabilise markets, support trade and help to prevent a breakdown in demand and economic activity. 3. recent monetary policy developments in south africa we are often asked how much influence global monetary policy has on domestic rate setting. of course, the monetary policy committee does take into consideration in its deliberations, the decisions of policymakers elsewhere. these are important inputs into the decision - making process, given the large spill - overs associated with global policymaking on economic and financial market variables. like other emerging market countries, south africa has witnessed significant portfolio inflows. in 2008, net outflows of r78 billion were recorded, and since 2009 until 26 november 2012, non - residents have bought a cumulative r280 billion worth of bonds and equities. the nature of these flows has changed, from being primarily equity inflows ( turning imf, the united states : spillover report, 2011 article iv consultation, imf country report no 11 / 203. bis central bankers ’ speeches from net inflows of r75 billion in 2009 to net outflows of r17 billion in 2011 and outflows of r8. 3 billion year - to - date ) to being predominantly bond inflows ( from net inflows of r15. 5 billion in 2009, to r85 billion year - to - date ). factors such as south africa ’ s inclusion into the world government bond index have supported this trend, as well as the appreciation of the rand for much of the past three years, and are a clear reflection of the interest rate sensitivity of capital flows. having twin deficits ( fiscal and current account ) and a low domestic savings rate, these inflows were not unwelcome, also to the extent that they helped to lower long - term borrowing costs. one can also argue that rather than inflows being diverted to south africa because of expectations of rand appreciation, it was the inflows that in fact caused to the rand to appreciate. whichever view is taken, the exchange rate of the rand did nonetheless appreciate from almost r12 against the usd in 2008 to under r6. 60 in 2011. other emerging markets lowered policy rates to support growth ; they also intervened in the exchange rate markets to try and stem appreciation pressure, or imposed capital controls. south africa ’ s policy rate was also lowered, although we were less aggressive than other emerging markets in dealing with these inflows as we did not at any time