Reserve Bank can simply delink or divorce the quantity of money (reserves) from the interest rate target and so also from the policy rate, writes Redge Nkosi
In the wake of a series of articles criticising the SA Reserve Bank’s response to the current crisis, the Bank governor
The East Asian economic miracle came about through the active use of central bank balance sheet approach to monetary policy. What is more, the disinflationary pressures caused by the hysteresis following the 2007/2008 crisis and the endless bouts of fiscal consolidations have dampened any near-term prospect of inflation. Couple this with the high capacity underutilisation, high unemployment, low credit and low oil prices, and add the disinflationary effects of the coronavirus pandemic. Inflation is distant.
What are the implications? Commercial banks' excess reserves would be remunerated at the policy rate. Another profitability advantage to banks would be the elimination of reserve tax, but so too will be the removal of the opportunity cost of holding excess reserve balances with the central bank. This besides the efficiency and the financial system stabilisation that come with it.
This divorce also settles the unfounded concern about the cost of the sterilisation of reserves that would otherwise take place after the large bond purchases. Sterilisation is where gilt purchases by the Reserve Bank are offset by withdrawals.
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