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Rand at Risk of Volatility as South Africa Starts Policy Change

  • Central bank moves to ‘tiered floor’ framework Wednesday
  • New system may make it cheaper to short currency: RMB

A change in the way South Africa’s central bank implements monetary policy may lead to greater volatility in the rand.

The transition will start Wednesday night and will see the central bank shifting to a surplus system from its current deficit set-up, meaning commercial banks will be allowed to hold and earn interest on excess reserves. The South African Reserve Bank will also introduce measures to prevent banks from hoarding liquidity, and thus help maintain an interbank money market, similar to the “tiered floor” framework used by the Reserve Bank of New Zealand and the Norges Bank.