Re: SARB Balance Sheet

Craig asks:

Isn’t targeting inflation and the exchange rate called disintermediation, which is supposed to be problematic – even if you’re a Keynesian?

Disintermediation is the process of eliminating a middle man. In a monetary policy sense this means when central banking fails to do what it is designed to do: to force commercial banks to borrow from it by centrally controlling base money and interbank interest rates, and banks fund themselves from capital markets instead, there is disintermediation. Otherwise, if bank depositors were to withdraw their funds from banks and invest their money directly, and not through the bank intermediary, it would be disintermediation.

So it seems the ZAR isn’t an entirely floating currency and that it’s fairly easy for the SARB to weaken the currency if they decide to, by printing. What could they do to strengthen the currency? Is that more difficult and do they have a much smaller capacity to achieve this if they wanted to? Is this correct: they could remove rands from circulation by issuing paper to make the ZAR more expensive, but that paper could be traded on the secondary market, which would affect interest rates, which would have an effect on the ZAR exchange rate?

The value of the ZAR is determined by the market process of supply and demand (free-floating), but the SARB is actively manipulating these market processes (central planning).

To strengthen the currency the SARB could simply stop printing base money, i.e. note and coin, for good. Yes, the SARB could issue debentures to drain liquidity out of the banking system. It would not be the trading of these debentures that will affect market interest rates, but rather the reduced supply of base money in the interbank market that will push interest rates higher, ceteris paribus.

It is also the reduced monetary inflation that results from a stable base money supply that would result in currency strength, not the interest rate.


About Chris Becker

Chris Becker is Market Strategist and Economist at ETM Analytics. Becker is Co-Founder of the Mises Institute South Africa. Visit his personal blog Follow him on twitter @chrislbecker.
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  • Craig

    I see… Thanks :)