Note on the Foreign Exchange Market Operations of the South African Reserve Bank
7 Pages Posted: 6 Oct 2014
Date Written: October 2013
Abstract
Capital inflows to emerging market economies increased substantially following the global financial crisis and subsequent implementation of unconventional accommodative monetary policies in advanced economies. Strong portfolio inflows put significant appreciation pressure on emerging market currencies, raising concerns about export competitiveness and growth prospects. A number of emerging market economies intervened in the foreign exchange markets to limit currency appreciation pressure, including intervening in the spot market and taxing purchases of domestic securities. The South African Reserve Bank did not intervene, instead allowing the rand exchange rate to be determined by forces of demand and supply. The Bank did, however, take the opportunity to increase the level of the country’s official foreign exchange reserves. The Bank had intervened in the foreign exchange market during previous episodes of currency weakness, but found the success thereof to be limited and the exercise costly. Despite this, the Bank recognizes that there are also costs associated with inaction in the foreign exchange market, which can be much higher than the costs related to intervention. Therefore, the Bank does not rule out the possibility of intervening in the foreign exchange market to dampen excessive exchange rate volatility and ensure both economic and financial stability.
Full publication: Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed?
Keywords: South African Reserve Bank, foreign exchange intervention, capital flows, foreign reserve accumulation, oversold forward book, net open foreign currency position
JEL Classification: G15, F31, E44
Suggested Citation: Suggested Citation