Monetary policy reform is the hot topic at the SA Reserve Bank these days. Proposed reforms to its monetary policy implementation framework will result in a fundamental change in approach from the current system, which relies on creating a money market shortage, to a system that relies on a permanent liquidity surplus. The shortage system has been difficult and costly to operate effectively as SA’s structural liquidity surplus has built up over time.
The persistent difficulty in reaching the target liquidity shortage prompted the Bank, which had been reviewing its framework for implementing monetary policy over the past few years, to accelerate the process of shifting to a new framework. It noted that while the shortage framework has functioned reasonably well in the past, its effectiveness has reduced over time and a replacement is due — in line with modern central bank approaches.
Under the tiered-floor framework the Bank would operate an ample-reserve system and pay interest at the repo rate on reserves in excess of the cash reserve requirement , but only up to a predetermined individual bank-specific quota. Above the quota, reserves will earn the punitive standing facility deposit rate of 100 basis points below the policy rate.