High levels of domestic expenditure have contributed to the widening deficit on the current account of the balance of payments. While the deficit is currently more than adequately financed by capital inflows, investor fears relating to the sustainability of the deficit increase the risks of exchange rate adjustments which could threaten the longer-term attainment of the inflation target.
The policy challenge is to maintain low inflation within the context of a growing economy and a sustainable external balance. There are also challenges facing our financial markets. South Africa is a small open economy by international standards. This in itself presents some challenges for the pursuit of domestic price stability.