the domestic growth outlook has deteriorated, not only due to developments in the euro zone and us, but intensified further by labour market instability. such actions as we have seen in the mining and agricultural sectors in particular, not only amplify wage pressures, but hurt output growth and export volumes, raise the prospects for even higher unemployment and aggravate the widening in the current account deficit. the third quarter gdp figures provided the first glimpse of the negative impact from the strike action, as growth slowed from 3. 4 per cent in the second quarter to 1. 2 per cent quarter - on - quarter. mining reflected a contraction of 12. 7 per cent, bis central bankers ’ speeches while manufacturing grew a paltry 1. 2 per cent. the negative impacts of the strike action on growth have not fully fed through and we are likely to see further weakness in the quarter ahead. both business and consumer confidence are far from robust and it is unlikely that the demand side of the economy will provide much support. the bank has lowered its growth forecast to 2. 5 per cent for 2012, improving to 3. 6 per cent in 2014 – with risks tilted to the downside. inflation forecasts on the other hand, have been adjusted higher and the risks are tilted to the upside. the forecast do not take into consideration the new cpi weights or the rebasing that will take place in january 2013, nonetheless, the cpi forecast was revised higher to 5. 5 per cent for 2013 ( previously 5. 2 per cent ), and the forecast for 2014 kept unchanged at 5. 0 per cent. the outlook for core inflation remains relatively benign, with a peak of 5. 0 per cent in the first quarter of next year and an average of 4. 8 per cent in 2013, dropping to an average of 4. 5 per cent in 2014. the combination of low global growth, domestic challenges further hampering the growth outlook, rising wage settlements, a weaker rand and higher current account deficit – makes for a very difficult combination of factors to consider when making policy decisions. olivier blanchard in 2006 presented a paper entitled “ monetary policy ; science or art ”. he said that monetary policy can pretend to be close to science if it can be conducted using simple and robust rules, however, monetary policy must be closer to art if it is frequently confronted to new, poorly anticipated and poorly understood, contingencies. in that case, each of these contingencies requires fast thinking and having to make decisions, not

design was followed, and the banks were exposed to four adverse scenarios, including a protracted recession and a period of excessive financial market volatility. the results of the exercise confirmed that south african banks were adequately capitalised to withstand significant credit losses throughout the stress scenarios, even before taking into account any mitigating action by their management teams. after the brexit referendum, financial markets in emerging - market economies were exposed to significant levels of volatility. the south african reserve bank and national treasury have been monitoring these developments and their possible implications for south africa. in a subsequent statement, the minister of finance, mr pravin gordhan, reassured the public that the banking and financial institutions in south africa were well placed to withstand any brexitrelated financial shocks. the south african financial system, including the banks and the regulatory framework which governs them, is resilient and robust and this had been clearly demonstrated during the global financial crisis. furthermore, we are starting to see tentative signs that export - orientated and importcompeting sectors may be starting to benefit from exchange rate depreciation. the most encouraging sign has been observed in the vehicle industry, where shipments abroad increased by 20, 5 per cent ( in volume terms ) in 2015 while the first few months of 2016 have shown a continuation of this upward momentum. the merchandise trade balance has improved, with a cumulative deficit of r18, 7 billion in january to april compared with r32, 0 billion in the same period a year earlier. 4. how monetary policy adjusted to the situation some may ask : “ isn ’ t there a risk that the consecutive interest rate increases implemented by the south african reserve bank over the past year may nip this recovery in the bud? ” as i ’ ve mentioned earlier, we must appreciate that “ policy space ” in south africa has narrowed. i would, however, like to expand on the bank ’ s monetary policy stance and how it interacts with the business cycle. bis central bankers ’ speeches clearly, the situation that we have faced in the past couple of years – a combination of slowing real economic growth and accelerating price pressures – is not one that central banks particularly enjoy dealing with. demand fell short of potential and our estimates show that the output gap remained negative in 2015 and is likely to widen somewhat this year. yet inflation accelerated, driven by exchange rate depreciation and a number of supply side factors, including drought and electricity supply constraints. despite a slightly improved