In early June, the South African Reserve Bank (SARB) began its 12-week transition to a new monetary policy implementation framework.
The amendments to the framework are largely technical in nature and are expected to change the way monetary policy is implemented in South Africa, according to Werkmsnas legal experts.
Historically, the SARB has implemented the classic cash shortage or reserve system to implement monetary policy – known as the “scarce reserves framework”.
This ensured that there was a shortage of liquidity reserves in the market and that a limited amount of liquidity reserves were available for commercial banks.
Commercial banks were therefore required to procure additional liquidity reserves from the SARB at the repo rate and which, in turn, ensured that the interest rate on these liquidity reserves was equal to the policy rate.
“We understand that the rare reserve framework worked relatively well in South Africa until the Director General of the World Health Organization declared Covid-19 a pandemic on March 11, 2020 and South Africa South declares Covid-19 outbreak in South Africa. a national disaster,” Werksmans said.
“During the pandemic, the SARB implemented measures to ease the liquidity pressure that the pandemic imposed on commercial banks and noted during the second half of 2020 that liquidity in the market had largely normalized, except with regard to the money markets, where the liquidity shortage was systematically lower than it was before the start of the pandemic.
Upon investigation, the SARB determined that South Africa’s structural excess liquidity had built up over time, making the scarce reserves framework “difficult and costly to operate” and that the system of ” Tiered Floor” would be a better and more cost-effective framework for South Africa’s monetary policy implementation.
What is the tiered floor system?
Under the tiered floor system, the SARB will provide excess liquidity reserves to meet commercial banks’ demand for liquidity reserves and impose quotas on all commercial banks:
- Limit the amount of cash reserves they can deposit with the SARB and earn interest (at the repo rate);
- Prevent hoarding of cash reserves.
“By introducing quotas into the tiered floor system, the SARB hopes to encourage commercial banks to lend some of their excess cash reserves to other commercial banks thus easing the pressure on the SARB as the sole provider of liquidity.
While South Africa is the first emerging market to adopt the tiered floor framework, the system is not a new concept and has been successfully implemented in several first world countries, such as New Zealand and Norway, said Werkmsans. He added that the system has proven to be effective in stabilizing demands for cash reserves from commercial banks.
“The SARB expects that the implementation of the Tiered Floor System S (with quotas) “provides the SARB with a resilient and effective framework for the implementation of monetary policy in South Africa” and encourages commercial banks to deposit cash reserves with the SARB, instead of requiring the SARB to provide cash to commercial banks.
- Commentary by Natalie Scott (director) and Kyra South (senior associate) at Werksmans.
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