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Working Paper
A Market-Based Assessment of the Outlook for Inflation Expectations and Monetary Policy in South Africa
Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific liquidity risk premia, this paper provides estimates of bond investors’ inflation expectations and associated inflation risk premia in South African sovereign bonds. The results suggest that investors’ long-term inflation expectations have gradually been declining towards the tolerance band adopted by the South African Reserve Bank in 2000. Although volatile, the estimated inflation risk premia have declined significantly since 2021, while a market-based estimate of ...