of the exchange rate on domestic petrol price increases has been in excess of 50 cents per litre. the producer price index also shows that while the headline ppi inflation increased by 7, 8 per cent, the imported component increased by 2, 1 per cent. this favourable inflation prognosis has allowed us to reduce interest rates to their lowest levels in about 30 years. our real interest rates are also low by comparison with recent experience. throughout the 2000s, depending how one measures real interest rates, the average real policy rate was between 3 and 3, 5 per cent. in the recent past this has declined to around 1, 5 to 2 per cent. under the conditions outlined, monetary policy is expected to remain relatively accommodative for some time, but contingent on changes in the outlook for inflation and the factors that impact on inflation. where does the economy go from here? south africa ’ s biggest internal challenge is unemployment, currently in excess of 25 per cent on the narrow definition. there is no doubt that addressing this must be the national policy priority. south africa ’ s unemployment is of a structural nature, and not something that can be solved by interest rates or the exchange rate alone. as we have noted on numerous occasions, interest rates can have a cyclical effect on growth or employment, but on their own will not be able to solve an inherently structural problem. it is incorrect to look at the interest rate or the exchange rate as the silver bullet that will solve the country ’ s growth problems. the exchange rate is just one element in the story, and excessive focus on the exchange rate could result in the neglect of other factors that would constrain growth even with an appropriately valued exchange rate. to improve south africa ’ s competitiveness and growth prospects requires concerted policy coordination across government departments. there are some obvious microeconomic reforms or initiatives that should be prioritised, and i will refer to only a few. a continued focus on infrastructure is essential. because the world cup is behind us, there should not be a decline in spending on infrastructure. this is one of the best forms of expenditure that can be undertaken. it is investment in the future as opposed to current consumption. it is productive, it provides jobs, and it helps alleviate constraints to growth and to exports. while there is a clear need to address the blockages affecting the mining sector, it does not help to increase mineral extraction if the rail infrastructure is unable to get the ore to the ports, and if the

these exit strategies. this optimistic view envisaged us policy rates being increased by the middle of 2010. there were, however, more pessimistic views which believed ( and some still believe ) that the risk of a double - dip recession was high. the current emerging consensus appears to be that while the risks of a return to negative growth are not trivial, the most likely outcome is for a protracted period of low growth in the advanced economies while the emerging markets are seen as the new growth engine. in essence, we have emerged from the recession, but not from the crisis. the reasons for the poor growth outlook vary across countries and regions. in the united states, the consumer is still deleveraging in the face of a housing market that has not fully corrected, and a withdrawal of the fiscal stimulus. in the euro area, the replacement of private credit and expenditure with state credit and expenditure resulted in a ballooning of fiscal deficits and debt ratios in a number of countries where debt to gdp ratios were already under pressure, particularly in southern europe. greece and italy, for example, have debt to gdp ratios of 130 per cent and 118 per cent respectively. pressure from the markets as well as the conditionalities related to the imf - led bail - out packages resulted in the implementation of austerity measures in a number of countries, and fiscal retrenchment became the order of the day at a much faster pace than was originally thought appropriate. fiscal adjustment in greece is planned to reduce the deficit from over 13 per cent of gdp to around 3 per cent of gdp in 2014, while in spain the objective is to reduce the deficit from 9, 6 per cent of gdp to 3 per cent by 2013. in the uk, government spending cuts for the current fiscal year have averaged 25 per cent across departments. the danger with such an approach is that the adverse impact on growth could set in motion negative debt dynamics which would make the overall debt situation even worse. it has been suggested by desmond lachman of the american enterprise institute, that the greek austerity programme would result in growth contracting by between 15 – 20 per cent, leading to an increase in the debt to gdp ratio to 180 per cent. while there is general agreement around the risks of excessive debt, there is less agreement as to how much is excessive, and how quickly it should be reduced. as george soros has recently argued, the premature pursuit of fiscal rectitude could wreck the recovery. at best