an address by lesetja kganyago, governor of the south african reserve bank ( sarb ), at the ninety - eighth annual ordinary general meeting of the sarb shareholders south african reserve bank, pretoria 27 july 2018 this past year was, to some extent, one of contrasting halves. the second half of 2017 saw a generally constructive global backdrop for south africa and other emerging markets. the recovery in the advanced economies continued at a steady pace, with most showing signs of sustained growth. in the united states ( us ), growth was above the estimated potential, and unemployment continued to decline. economic activity in the euro area surprised on the upside after a protracted period of sluggish growth. a notable exception to this trend was the united kingdom, where growth prospects were adversely affected by the uncertainty arising from the decision to leave the european union. there were also indications that, while the withdrawal of monetary policy stimulus was likely to continue in the advanced economies, the policy tightening cycle was expected to be moderate. these settings remained supportive of strong capital flows to emerging markets. stronger demand underpinned higher commodity prices, reinforced by strong growth in china. this favourable setting did not last long into the first half of 2018. expectations of a faster pace of monetary tightening than previously expected began to emerge as the strong us growth was sustained. the us unemployment rate reached levels below the estimated natural rate, while fiscal policy became more expansionary. this put upward pressure on long - term us treasury yields, which exceeded 3 % for the first page - 1 - of 9 time since july 2011. surprisingly, us inflation remained stubbornly below the target of 2 % in the absence of significant wage growth. the recent communications of the federal open market committee appear to have reinforced the likelihood of a tighter stance, which in turn has sustained us dollar strength. by contrast, growth in the euro area and japan slowed, leading to a reassessment of expectations of early withdrawal of monetary policy accommodation in these regions. in addition, the strong dollar effect dominated global markets, which saw a reversal of capital flows from emerging markets, reminiscent of the so - called taper tantrum in 2013. while most emerging markets are assessed to be more resilient to these developments than was the case at that time, their exchange rates and bond yields have come under pressure, although experiences have differed widely. two other developments overshadowed the global environment in the first half of 2018. first, while most commodity prices declined during the first half of

particularly in the context of a moderation in inflation expectations during the first half of this year. for some time, these expectations had been stubbornly anchored at the upper end of the target range. in july 2017 and march 2018, the sarb ’ s monetary policy committee ( mpc ) reduced the repurchase rate by 25 basis points on each occasion, to its current level of 6. 5 %. the mpc still assesses the monetary policy stance to be accommodative, and appropriate in the context of the current state of the economy. but there is a limit to what monetary policy can do to stimulate growth. at best, monetary policy can provide some support over the cycle, and can provide a stable environment for growth. as the mpc has emphasised on numerous occasions, a firm commitment by government to credible structural policy initiatives and implementation is required to make an appreciable impact on employment and potential output. at the march mpc meeting, we warned that the global risks in particular could upset the improved inflation outlook. unfortunately, these risks, which i have highlighted earlier, have taken centre stage. since april, the rand has depreciated, alongside other emerging market currencies. together with the higher international oil prices, the page - 4 - of 9 depreciation of local currency has resulted in domestic petrol prices reaching record highs in nominal terms. furthermore, risks from higher electricity prices have also emerged. at the recent meeting of the mpc, the repurchase rate was kept unchanged, although concern was expressed regarding the possibility of upside risks to the inflation outlook materialising. at this stage, inflation is still expected to remain within the target range for the forecast period, but at higher average levels than previously thought. the most recent forecast suggests that inflation will average 4. 8 % this year, but is then expected to rise to 5. 6 % and 5. 4 % respectively in the coming two years. this upward drift will not help in our quest to get inflation and inflation expectations anchored closer to the midpoint of the target range. however, because the deteriorating outlook is driven mainly by supply - side factors, the mpc will look through the first - round effects. the mpc will maintain its vigilance and will react should there be second - round effects that take inflation significantly away from the midpoint of the target range. protecting and enhancing financial stability is now an explicit statutory mandate of the sarb. after a protracted process