##ics countries are lower, in 2013, than similar estimates made in 2011. 3. the likely impact of declining global liquidity the impact of somewhat less favourable fundamentals has, of course, been compounded by concerns that the ample liquidity made available in recent years to fight the global crisis will gradually be withdrawn, perhaps in the not - too - distant future. the announcement by the us federal reserve in may that conditions would probably soon warrant a tapering of its asset purchase programme – which incidentally does not equate to a reduction in global liquidity, merely to a phasing down of additional injections – quickly resulted in a sharp rise in the risk premium embedded in most emerging market assets. since chairman bernanke first talked about tapering on 22 may 2013, the jp morgan index of emerging market currencies has lost 7. 5 per cent of its value versus the us dollar ; the emerging market bond index ( embi ) local currency index has fallen by around 2. 4 per cent at the same time as the embi - plus sovereign spread of us dollar - denominated debt over us treasuries increased by close to 100 basis points ; and the msci emerging market equity index has fallen by 4. 0 per cent, even as the msci world index of global equities continued to power ahead, gaining 6. 0 per cent over the period. what will happen, then, when global central bank liquidity starts declining in earnest? admittedly, the response to tapering talk since may need not necessarily be a guide to future market moves, as the reduction in the federal reserve ’ s asset purchases is probably by now discounted to a much larger extent than it was before chairman bernanke spoke to congress in may. to the extent that the fed does not again surprise markets, but instead manages to stabilize expectations embedded in the longer part of the us yield curve, for example via the continued and effective use of its forward guidance, the impact on the global asset price constellation could be more benign than it has been so far this year. but how much is priced - in, nobody really knows. nonetheless, the strong correlation seen since the second quarter of 2013 between the exchange rates and bond yields of emerging countries ( especially those seen as the most vulnerable to a reversal of capital inflows, because of more fragile domestic growth or external account fundamentals ) and us treasury yields, does highlight the vulnerability of the former to a further backup in the

of inflation that the mpc must consider is that which is expected to prevail over the coming 12 - 24 months. page 5 of 8 unfortunately, the inflation forecast is far less benign than the levels currently being experienced. headline inflation is expected to increase from an average of 4. 8 % in 2018 to 5. 7 % in 2019 and 5. 4 % in 2020. this includes a forecast peak of 5. 9 % in the second quarter of 2019. the upward trajectory of inflation is driven by the pass - through from the recent exchange rate weakness, rising food and oil prices, a narrowing output gap, and our expectation that nominal wage growth will remain above the upper end of the inflation target range over the forecast horizon. the sarb ’ s quarterly projection model ( qpm ) forecasts inflation simultaneously with the repurchase rate ( repo rate ) as part of its general equilibrium framework. given the outlook for the exchange rate, the output gap and inflation, the qpm forecasts five interest rate hikes of 25 basis points each by the end of 2020. all other things being equal, if monetary policy tightens by less than the model predicts, inflation may come out higher than is currently expected. the repo rate forecast of the qpm is merely a guideline and does not fully account for the balance of risks or for the uncertainty around the variables, both included in and excluded from the model. the mpc may well diverge from this endogenously generated interest rate path. nevertheless, the key point is this : if the inflation forecast plays out as expected, monetary policy tightening will be required to stop inflation, and potentially also inflation expectations, from moving outside of the sarb ’ s target range for an extended period of time. the likelihood of slightly higher nominal interest rates over the medium term must be put in context, however. monetary policy has been, and remains, accommodative. had the economy not been so weak, the policy stance would in all likelihood have been different. it is also worth bearing in mind that it is the real repo rate that is relevant when thinking about the policy stance. thus, monetary policy can remain accommodative of the large negative output gap, even as the nominal interest rate rises, if it is rising alongside higher expected inflation. page 6 of 8 from this discussion, it should be clear that the mpc faces a challenging outlook. it is difficult to balance the large negative output gap and downs