The main objective of monetary policy in South Africa is to establish a stable financial environment in support of sustainable real economic growth over the medium and longer term. The South African Reserve Bank believes that financial stability may not provide a guarantee for economic growth, but it certainly is an important precondition for the maximum employment of the resources of the economy, including the labour force. For this purpose, guidelines are set by the Reserve Bank at the beginning of each calendar year for an acceptable rate of growth in the M3 money supply. For 1995, guidelines of 6 to 10 per cent were decided on with the intention of providing for real growth in the economy of between 3 and 4 per cent, and the recognition of a rate of inflation of 9 per cent in 1994. The intention was therefore that monetary policy should exert further downward pressure on inflation during the course of 1995.
Money is created in South Africa mainly through the extension of credit by banking institutions.
In setting guidelines for an acceptable rate of growth in the money supply, the Reserve Bank indirectly provides indicative limits for the growth in the total claims of the banking sector on the private sector or, viewed from a different angle, for the increase in the total indebtedness of the private sector to the banking sector. The monetary model as applied in South Africa therefore gives the Reserve Bank a vested interest in the total credit extension of the banking sector. The Reserve Bank can influence the amount of bank credit extension either by influencing over-all liquidity in the banking sector, that is, by influencing the supply of credit, or by influencing the demand for credit emanating from the private sector. The demand for bank credit is to an important extent interest rate driven. By influencing the general level of interest rates, the Reserve Bank can exert some influence on the total demand for credit, and therefore on the money supply.