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Download level money8/24/2023 ![]() (This is often called the savings and investment channel). Together, these effects weaken demand, reducing price pressures in the economy. It will also promote saving and discourage borrowing. This will do at least four things:įirst, it will increase costs for borrowers with floating interest rate debt (such as the interest rate on home loans). Monetary policy in South Africa aims to achieve and maintain price stability in the interest of balanced and sustainable economic growth and transmits to the economy through different channels.Ĭonsider a scenario where the central bank raises the interest rate. For this reason, economists now rarely study money supply data to understand inflation, focusing instead on the factors described above. But except for extreme cases, changes in the amount of money in circulation do not predict inflation very well. Printing money is perhaps the most obvious cause of inflation, responsible for all historical hyperinflations. Prices can fluctuate for reasons other than monetary policy, but a sustained change in the price level requires more money in circulation, and therefore the consent of the central bank which prints it. Inflation is fundamentally a monetary phenomenon. But if workers and firms then change their inflation expectations in response to the fuel price shock, inflation may increase due to expectations. For example, a rise in fuel prices can increase inflation (supply-side shock). These three drivers of inflation interact in complex ways. When inflation expectations get out of control, demand can be very weak but prices still rise rapidly. This logic applies throughout the economy. For instance, employees usually expect a cost-of-living increase each year. People who set prices and wages factor inflation into their decisions. All countries experience supply and demand shocks, but different countries tend to have markedly different inflation rates. Expectations: This is the most abstract cause of inflation, but also the most important, especially for central banks.For example, a drought raises food prices. Conversely, inflation could increase if it becomes more expensive to produce a good or service. For example, globalisation made it cheaper to produce manufactured goods such as clothes and electronics. Supply-side inflation: Inflation tends to decrease if it becomes cheaper to produce a good or service.By contrast, when consumers are under pressure and spend less, prices rise more slowly. Demand-side inflation: When consumers spend more money, prices tend to rise faster.Monetary economists identify three basic causes of inflation: demand, supply and expectations. Stats SA monitors these prices throughout the year, and reports any changes each month. This index represents a typical basket of goods and services used by South African households, comprising everything from lottery tickets and petrol to life insurance. In South Africa, the standard measure of inflation is Statistics South Africa’s (Stats SA’s) consumer price index. This shows that inflation dynamics reflect a country’s economic structures and policy choices. For example, inflation in the United States averaged 1.8% in Turkey it was nearly 10%. Other countries had different inflation rates over the same period. For instance, in South Africa, consumer prices rose by 65% between 20, at an average annual inflation rate of 5.2%. Most economies are inflating all the time: every year, prices are generally higher than they were the year before. Inflation involves much more than price shocks such as higher petrol prices. Inflation is an increase in the general price level of an economy. They can later repurchase (repo) that asset at a lower price, which reflects the interest they paid (i.e. The repo rate is so called because banks give the SARB an asset, such as a Government bond, in exchange for cash. This affects the borrowing costs of the financial sector, which, in turn, affect the broader economy. Monetary policy is implemented by setting a short-term policy rate – the repo rate. The value of the currency is therefore protected relative to domestic consumer prices. To protect the value of the rand, the SARB uses inflation targeting, which aims to maintain consumer price inflation between 3% and 6%. The monetary policies of countries may differ, but most major economies aim for low and stable inflation, and have publicly announced inflation targets. The basic aim of monetary policy is to determine how much money an economy should have in circulation. ![]() The SARB then independently makes monetary policy so as to achieve this target. National Treasury, in consultation with the SARB, sets the inflation target, which acts as a benchmark against which price stability is measured. The SARB uses interest rates to influence the level of inflation. Monetary policy is the means by which central banks manage the money supply to achieve their goals.
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