The balance of views within the central banking community has been shifting in this direction (Carney, 2009; Shirakawa, 2009; Trichet, 2009; Cagliarini et al, 2010; Woodford, 2010 and Fischer, 2011).
In order to take account of movements between the currencies of South Africa’s major trading partners, (for example the recent sharp depreciation of the euro against the US dollar), we focus on the effective or trade-weighted exchange rate. Given the difficulties in forecasting the exchange rate, we make a simplifying assumption of a constant real exchange rate over the forecast period.