of the target range for more than 20 months, accelerating from 7. 1 per cent in september 2010 to around 12. 0 per cent in august 2011. rising prices for food, petrol and electricity contributed 1. 1 percentage points, 1. 6 percentage points and 1. 0 percentage point respectively to the august reading, and greatly influenced what otherwise would have been a somewhat more benign inflation environment. core inflation has also edged up in recent months, although the overall underlying inflation trend appears relatively well contained for now. alongside the increase in inflation, inflation expectations, as measured by both the reuters survey of financial analysts, and the bureau for economic research, have adjusted higher towards the upper end of the inflation target range. whereas inflation expectations remain on average within the target range for the forecast period ending 2013 and as such appear to be relatively well anchored at present, future developments in this regard will require careful monitoring. nominal wage settlements, although well above the upper end of the inflation target range, have moderated. the average wage settlement rate in the first half of 2011 amounted to 7. 5 per cent, compared to 8. 2 per cent in 2010. nominal unit labour costs decelerated from 10. 7 per cent in the second quarter of 2010 to 5. 3 per cent in the first quarter of 2011, despite a marked decline in productivity. demand - side pressures are currently relatively subdued and not expected to exacerbate inflationary pressures in the short term. economic activity in south africa decelerated from 4, 5 per cent real gdp growth in the first quarter of this year to 1. 3 per cent in the second quarter. south africa is currently growing at below its potential growth rate, which we estimate to be around 3. 5 %, with an output gap of around 3 % in the second quarter of 2011. during this quarter the deceleration in economic activity was recorded across the agriculture, mining and manufacturing sectors, with only a marginally stronger performance recorded in the services sector. the combination of adverse weather conditions, industrial action and safety - related stoppages at certain mines contributed to this disappointing performance. high frequency data points to continued weak conditions in the mining, manufacturing and construction sectors and this is also reflected by declining business confidence, to well below the neutral level of 50. the manufacturing sector, which contributes about 15 per cent to gdp, contracted by 7 per cent year - on - year during the second quarter. the monthly manufacturing data and the kagiso purchasing managers ’ index (

be more suitable for, or may have been calibrated to be more applicable in, developed markets ; they may not always be fit - for - purpose in emerging markets such as south africa. the large banking groups regulated by the sarb mainly have operations on the african continent and / or in other emerging markets. some supervisors on the continent and in other emerging markets where south african banks have operations have yet to implement the regulatory reforms. this imposes an obligation on the sarb, which is the only african member of the basel committee on banking supervision, to effectively supervise the subsidiaries of south african banks in the rest of the african continent and other emerging markets. failure to do this creates inconsistencies in how regulatory capital and other risks are measured, and in how supervisory standards are applied. another example of an inconsistent application of international standards is different supervisory expectations in africa of the same international standards relating to the use of risk models under the advanced measurement approaches. although there is a need for more standardisation and comparability of risk - weighted assets across banks and jurisdictions, the sarb believes that there remains a need for banks to be able to apply quantitative risk models to adequately measure risk across portfolios and / or risk types. if the expectation is to reduce the use of risk models in measuring regulatory capital, then banks will become less inclined to invest in the use of test requirements imposed under basel ii. the sarb believes that the use of test requirements has made a significant positive contribution to the way in which banks measure and manage risk, and that this has led to improved risk management and pricing of risk across the regulated entities. the sarb supports the risk models under the advanced measurement approaches to be used. the regulatory framework is beginning to succeed in meeting its objective of addressing the ‘ too big to fail ’ problem as g - sibs are in general adjusting their balance sheets and evaluating their complex business models to meet strengthened regulatory demands in many areas, especially in respect of higher - quality capital ratios and the difficult economic environment we are currently facing. as you know, these developments have spilled over into south africa when a g - sib headquartered in the uk2 announced its partial withdrawal from a domestic systemically important bank, or d - sib, mainly due to global regulatory pressures. as a result, we might face various policy considerations going forward as we need to carefully assess the effect and potential impact of home regulatory requirements on local markets and if we are not perhaps importing structural instability ( uncertainty