Executive summary:Global growth is improving, but progress is incremental and the outlook is suffused with uncertainty. Monetary policy normalisation in advanced economies, which presages a return to economic health after what has been an unusually protracted recovery, is both an unavoidable and essentially positive development. Nonetheless, this process will exert considerable pressure on emerging economy currencies and policy settings. It will also create volatility; over the past year, sentiment has moved sharply against emerging markets before reversing, as markets were persuaded that subdued inflation and modest growth in advanced economies meant interest rates would be lower for longer.In this context, South Africa’s macroeconomic settings remain generally expansionary. Interest rates are very low, with the real repurchase rate slightly negative. Fiscal deficits are substantial, although they are programmed to decline over the medium term. South Africa is absorbing considerable quantities of foreign savings to supplement its own meagre savings rate, and the corresponding current-account deficit has been large and persistent at more than 5 per cent of gross domestic product.In January, the Bank’s policy rate was raised from 5 per cent to 5,5 per cent, the first upward adjustment in over half a decade, marking the beginning of an interest rate tightening cycle. The policy change was predicated on a deteriorated inflation forecast, which showed an extended breach of the target starting sometime in the second quarter of 2014. In line with this projection, inflation breached the target in April, reaching 6,1 per cent. It is expected to remain outside the target range until the second quarter of 2015.The primary cause of the deteriorating outlook has been rand depreciation, a trend dating back to 2011, and which accelerated in late 2013 and early 2014. Over much of this period, the pass-through from exchange rate weakness to consumer prices seems to have been low, aided by falling international food and stable crude oil prices. Petrol prices, which are administered, respond promptly to changes in the exchange rate, but there is now also a more generalised rise in prices, as evidenced by a gradual increase in core inflation. Furthermore, inflation expectations are clustered around the top end of the target, reducing policymakers’ leeway to accommodate shocks.