​Monetary policy faces difficult conditions. World financial and commodity price trends are shifting in unfavourable directions for South Africa. The problem is compounded by adverse local food and administered price shocks. The interaction of these forces with domestic pricing rigidities is producing persistently high inflation, despite weak and slowing growth. The policy response has been a gradual tightening cycle, with the repo rate moving from 5,00 to 5,75 per cent in 2014 and then to 6,25 per cent in 2015. This is aimed at containing price pressures and managing inflation expectations so that the adjustment to changing conditions and price shocks does not permanently accelerate inflation, to the economy’s longer-term detriment. Commodity prices peaked in 2011, following China’s rebound from the Great Recession. They have since trended downwards, with the pace of decline accelerating over the past six months. It has been clear for some time that the Chinese economy is slowing and shifting away from investment-driven growth. Both these factors reduce its demand for industrial commodities. From about mid-year, risks of a more abrupt slowdown prompted renewed market volatility at the global level, and solidified the consensus that the commodity super cycle is winding down. Like commodity prices, world financial conditions were extremely favourable for emerging markets in the years shortly after the global financial crisis. Advanced economy policy rates fell almost to zero and quantitative easing and forward guidance helped lower longer-term rates. As a result, investors moved large quantities of capital into emerging markets in a search for yield. Financial conditions for emerging markets grew more challenging from 2013, mainly as a result of developments in the United States (US). Speculation around the onset of normalisation, starting with the ‘taper tantrum’ of May 2013, lifted financing costs both within the US and for many foreign borrowers. Since then, higher rates in the US have attracted capital inflows, causing the US dollar to appreciate to a 12-year high. Emerging markets, by contrast, have experienced erratic capital flows and widespread currency depreciation. Capital flows to emerging markets were negative throughout the third quarter of this year, making it the longest sustained period of capital leaving emerging markets since the crisis. South Africa’s economy is exposed to shifts in both the commodity and financial cycles. Lower commodity prices weigh on growth, discouraging investment and eliminating jobs. By reducing the value of exports, they also tend to sustain the current-account deficit – which becomes more difficult to finance as capital flows out of emerging markets and borrowing costs rise. These factors have combined to generate significant currency depreciation, which has been an important contributor to inflation and a major risk to the inflation forecast. The growth forecast has also deteriorated. This is in part due to weaker export revenue. The challenge has been magnified by idiosyncratic factors, including electricity shortages and drought. Potential growth has declined to about 1,8 per cent for this year. Realised growth is likely to come in slightly below that, at around 1,4 per cent, implying a slightly more negative output gap.An economy with low and slowing growth and elevated unemployment might experience moderating inflation, as price and wage setters lose bargaining power in conditions of weak demand. In such circumstances, monetary policy would have the scope to lower rates to support growth. Unfortunately, South African trends are different. The outlook for inflation has been persistently high despite slowing growth and favourable price shocks (particularly from oil prices). The forecast shows temporary breaches of the inflation target range in 2016, with inflation averaging 6 per cent for the year. For 2017, headline inflation remains close to the top of the target range. The risks are skewed to the upside. Core inflation has been above the midpoint of the target range since