. 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

budget. 6. conclusion the south african reserve bank is therefore at present, according to all distinguished principles, a fairly autonomous central bank and fulfils all the main conditions necessary for independence. the constitution of the republic of south africa also formally recognises the independence of the reserve bank. the constitution namely states in section 196 that : “ the south african reserve bank shall, in the pursuit of its primary objective.... exercise its powers and perform its functions independently, subject only to an act of parliament.... provided that there shall be regular consultation between the south african reserve bank and the minister responsible for national financial matters ”.