. this may even include the managers of the national budget who have learned through experience that taxation through inflation often meets with less resistance from ill - informed tax payers. for the economy as a whole, however, inflation is always bad. an argument is often made for a trade - off between inflation and growth based on the philips - curve analysis in terms of which, at a low level of inflation, real growth can be stimulated through an expansionary monetary policy, even if it should create some higher rate of inflation. there may be some truth in this for the short - term but it is easy to prove that a continuing expansionary monetary policy will eventually lead to an acceleration in the rate of inflation. a little bit of inflation once started can easily gain momentum, get out of control and develop into hyper - inflation. it is also true that with modern electronic forecasting techniques and increasing sophistication in the role of rational expectations, the effective period for the trade - off has become very short. 4. how does the reserve bank achieve financial stability? inflation is a monetary phenomenon, i. e. inflation cannot take place without a more rapid increase in the quantity of money than in output, provided that the velocity of circulation of money remains unchanged. although the causes of inflation are too wide for any individual institution to prevent it from occurring, the reserve bank can at all times use the powers at its disposal to reduce inflationary pressures by influencing the growth in money supply and bank credit extension. the reserve bank can influence money supply and bank credit extension either by influencing overall liquidity in the banking sector, that is, by influencing the supply of money or by influencing the demand for credit emanating from the private sector. liquidity in the banking sector can be influenced through various operational instruments, such as changes in minimum cash reserves for banking institutions, open market - operations and short - term money market interventions through swaps and repurchase transactions. 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. the main operational instrument in this case will normally be the repo rate, that is the interest rate at which the reserve bank provides in the liquidity needs of banking institutions. in its objective to establish and maintain financial stability another important responsibility of the reserve bank is to encourage and support the development of sound and well - managed banking institutions

. the role of monetary policy south africa has a flexible inflation targeting framework for monetary policy. flexibility means that inflation does not have to be within the target at all times ; instead, policymakers will look through passing shocks – for example, during the temporary departure from the target in august 2013, which was driven by petrol prices. flexibility also means avoiding abrupt interest rate movements which might destabilise the economy. but flexibility does not mean ignoring sustained breaches of the target. with inflation expected to be above 6 % for about a year, and given that that the exceptional period of ultra - low world rates is ineluctably drawing to a close, the reserve bank has commenced a monetary policy tightening cycle, starting with a 50 - basis point increase in january. in describing the revised monetary policy stance, we have been at pains to emphasise that this tightening cycle will not necessarily move rates as far or as fast as in previous cycles. there are good reasons for this. subdued economic growth reduces demand - driven inflation. fiscal policy has moved in the direction of consolidating deficits, which should ease pressure on capital markets. world rates are very low, and may not return to pre - crisis norms. global inflation is subdued. we have also emphasised that monetary policy remains accommodative, despite the january hike. it is easy but wrong to confuse the change in monetary policy with its level. in real terms, the repo rate is still negative. furthermore, since 2009, the mpc has accepted inflation closer to the upper end of the target than it might in different circumstances, so as to support the recovery. in other words, monetary policy has done a great deal to assist growth. but this is not the only message to bear in mind when thinking about the monetary policy stance. the other message is that monetary policy is not the long - run solution to south africa ’ s growth problems. over the long - run, monetary policy is effective at achieving price stability, but it can generate additional growth only at the cost of rising inflation. this is why the bank ’ s core mandate is for price stability. to address high inflation and low growth, what south africa really needs are structural reforms. and it needs them even more urgently given the paucity of alternatives : • the two growth engines which powered the economy in the late 2000s are running down. commodity prices remain high, in comparative perspective, but south africa ’ s terms of trade peaked in 2011, and will