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The previous Monetary Policy Committee (MPR) was published in November 2011 at a time of deep concern about the global economy and its near-term trajectory. This MPR also marks a point of heightened uncertainty and concern over a range of critical economic developments, primarily in Europe.

A key characteristic of the global financial and economic crisis and its aftermath has been a slow and turbulent recovery, marked by sharp swings in economic outcomes and sentiment. Political change has become an increasingly common occurrence as the global economy seesaws and unemployment remains stubbornly high.

The difficulties of the global economy were starkly evident in the second half of 2011, as forecasts for growth were marked down and inflation projections marked up nearly everywhere. A sharp rise in international oil prices contributed to an increase in headline inflation in almost all countries and regions in 2011.

Growth in emerging-market and developing economies had remained quite strong but, as the end of the year approached, export and import dependencies and financial contagion effects, among other linkages, resulted in a more generalised slowdown. Robustly growing economies such as China, India and Brazil slowed abruptly.

A moderation in global consumer price inflation began late in 2011 and continued into 2012, providing some relief to the heightened concerns about inflation evident earlier in 2011. This trend has enabled major advanced and emerging economies to retain accommodative monetary policies to support real economic activity.

Somewhat better-than-expected economic growth rates in a few larger economies in recent months have also contributed to marginal upward revisions to global growth forecasts for 2012 and 2013.

Yet, confidence in the recovery remains extraordinarily fragile due to the still-unresolved European sovereign debt crisis and the halting and inconsistent real economy outcomes. The financial situation of Europe’s banks and sovereigns remains the single biggest risk to the global recovery. The combination of financial and real economy factors has resulted in sharp and unpredictable changes in risk aversion and, hence, volatility in international capital flows and exchange rates.

In keeping with the ups and downs of the global situation, inflation concerns have ticked up again very recently in some advanced and emerging-market economies.

These international developments shaped domestic growth and inflation outcomes in South Africa, and set out the potential risks to the medium to longer term outlook. South Africa’s uneven and fragile economic recovery gained momentum in the fourth quarter of 2011 as negative supply shocks dissipated. Growth in fixed capital formation firmed in the course of the year and into 2012.

Household consumption expenditure continued to provide the main support to the domestic recovery as job creation picked up, alongside stronger growth in credit extension. Recent data, however, have been disappointing. The economic outlook for South Africa remains modest with a gradual recovery in domestic demand and supply expected, barring further international turbulence. The probability of future growth and financial shocks emanating from global developments remains high.

Domestic inflation breached the inflation target range in November 2011 but returned to the upper six per cent level in March 2012 before again breaching the target in April. The largest contributions came from food and administered prices. Wage pressures have moderated somewhat. Exogenous price pressures remain elevated, although again there are some indications of moderation. While core inflation remains moderate and contained, its upward trend has been a source of concern. Oil prices continue to pose a major risk to both growth and inflation outcomes in 2012 and beyond.

The inflation outlook has improved in terms of both the projected level of the peak and the profile of returning to the target. On balance, there is upside risk to the inflation outlook. The main risks to the inflation outlook remain the oil price, administered prices and the impact of global risk adjustments on the exchange rate.

This MPR analyses the latest developments in inflation and the factors that affect inflation. It reviews recent monetary policy developments, discusses the outlook for inflation and presents the growth and inflation forecast of the Bank. In addition, topical issues are addressed in boxes. The first box reviews the regulatory setting of tariffs in the energy sector.

The second box considers how global investor sentiment, as reflected by risk aversion, impacted on asset prices in emerging-market countries, including exchange rates and how it, in turn, affects inflation in the case of South Africa. The third reports on recent changes to the Bank’s monetary policy operational procedures to enhance domestic liquidity management as part of monetary policy implementation.