ECON
211
ECON211
Makro-ekonomie
ECON211
Macroeconomics
Monetary policy
Study unit 5
Chapter 9 in Fourie & Burger
9.1 Definitions and main instruments
Monetary policy: All deliberate steps of the monetary authority to affect the money
supply, the availability of credit, and interest rates in order to influence
monetary demand, expenditure, production, income, the inflation rate, the
exchange rate, and the balance of payments.
9.1 Definitions and main instruments
SARB
“The South African Reserve Bank is the central bank of the Republic of South Africa. The primary purpose
of the Bank is to achieve and maintain price stability in the interest of balanced and sustainable economic
growth in South Africa. Together with other institutions, it also plays a pivotal role in ensuring financial
stability.”
Source: SARB
Objectives:
• Inflation targeting
• Financial stability
Independence:
• Goal independence
• Instrument independence
9.1 Definitions and main instruments
Basic monetary policy instruments:
• Repo rate
𝑀𝑀𝑆𝑆
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 ↑: ↓ 𝑟𝑟 ↑ 𝐼𝐼 ↓ 𝐸𝐸 ↓ 𝑌𝑌 ↓
𝑃𝑃
• Cash reserve requirement
𝑀𝑀𝑆𝑆
𝐶𝐶𝐶𝐶𝐶𝐶 ↑: ↓ 𝑟𝑟 ↑ 𝐼𝐼 ↓ 𝐸𝐸 ↓ 𝑌𝑌 ↓
𝑃𝑃
• Open market operations
𝑀𝑀𝑆𝑆
𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏: ↓ 𝑟𝑟 ↑ 𝐼𝐼 ↓ 𝐸𝐸 ↓ 𝑌𝑌 ↓
𝑃𝑃
• Direct measures such as credit and interest rate ceilings.
9.2 Monetary policy design
The Constitution and Reserve Bank Act dictates that the SARB mandate
is “the protection of the value of the rand”.
• Internal value of the rand – inflation
• External value of the rand – exchange rate
Prior to 2000 the SARB interpreted the constitution as prescribing both
the internal and external value of the rand, but since then it has shifted
to understanding its mandate to be only the protection of the internal
value of the rand.
9.2 Monetary policy design
Intermediate vs final policy targets
• Final policy targets – specific inflation target
• Intermediate policy target – specific target for interest rates or money
supply (in order to ultimately influence inflation)
1986 – 2000: SARB had official money supply target
2000: SARB announced official inflation targeting (3%-6%).
9.2 Monetary policy design
Money supply vs interest rate focus:
• Money supply and interest rates cannot both be fixed without
deviating substantially from the market interest rate and money
supply.
• Either money supply is fixed and interest rates adjust accordingly,
• or interest rates are fixed and money supply adjusts accordingly.
• If there is a major deviation from the market interest rates and money
supply, then black market credit services will increase and the SARB
will have no control over the monetary market. This means that
borrowers and lenders will interact without bank intermediation
(disintermediation).
9.3 Inflation targeting in South Africa
Advantages of inflation targeting:
• SARB only has responsibility for one policy outcome.
• Avoids conflict between different objectives (eg. Unemployment vs inflation).
• Inflation targeting is a framework, and does not have to be adhered
to in extreme cases (explanation clause).
• Easy to understand
• Unambiguous
• Transparent
• Predictable
9.3 Inflation targeting in South Africa
Disadvantages of inflation targeting:
• Difficult to select price index
• SARB used CPIX instead of CPI prior to 2008.
• Since 2009 imputed rent rather than the interest rate on mortgages was used
in calculating CPI, and SARB switched to using CPI.
• Unforeseeable exogenous shocks can influence inflation.
• Exchange rate crises
• Oil price shocks
• Financial crises
• Restricts potential monetary policy tools.
9.4 The practice of monetary policy
Monitoring the monetary environment
• Monetary liquidity
• Money and capital market interest rates.
• Liquidity
• Accommodation (bank credit at the SARB)
• Bank credit extended to private sector
• Coins and notes in circulation
• Private deposits at commercial banks
• Government deposits at banks
• Borrowing requirements of government and the public sector
9.4 The practice of monetary policy
Monitoring the monetary environment
• External sector variables
• Exchange rate
• Balance of payments
• Financial account
• Current account
• Various international trade statistics
• Gold reserves
• Other foreign reserves
• International flows of funds
• Foreign exchange transactions
• Foreign assets
• Inflation rate
• Analysis of price indices to determine the underlying trend in inflation.
9.4 The practice of monetary policy
Operational procedures:
• Repo rate is announced after MPC meetings (bi-monthly)
• In a repurchase transaction, the bank sells financial instruments to
SARB and undertakes to purchase it back after seven days at a higher
price (a one day option is also available).
• The difference between the buying and selling price can be expressed
as an interest rate. That interest rate is the repo rate.
• SARB provides as much liquidity as is needed to ensure that the repo
rate is at the level agreed on at the MPC meeting.
9.4 The practice of monetary policy
9.4 The practice of monetary policy
Monetary Policy Committee meeting dates for 2021:
• 19 - 11 January 2021
• 23 - 25 March 2021
• 18 - 20 May 2021
• 20 - 22 July 2021
• 21 - 23 September 2021
• 16 -18 November 2021
9.5 Public debt management
• The decisions and actions of the monetary and fiscal authorities to
attain certain objectives with regard to the magnitude, composition
(according to type of debt instrument), term structure and ownership
structure of public debt.
• Government debt can have a considerable impact on financial
markets and is therefore important to consider in monetary policy.
• Government’s demand for credit is a substantial component of overall
demand for credit.
• Large bond issues could put upward pressure on interest rates, which
the monetary authority would need to consider, especially when they
are attempting to lower interest rates.
9.6 Exchange rate policy
• South Africa has a dirty (controlled) floating exchange rate system.
• This means that the exchange rate is mostly free floating, but that the Reserve
Bank can influence it.
• The SARB has done little to influence the rand value since 2000.
• Changes by monetary authorities on interest rates and money supply
will have an impact on capital inflow and therefore on the exchange
rate. (See Ch4)
• The Reserve Bank therefore monitors the exchange rate closely and takes it
into consideration in its monetary policy.