The Rand, Interest Rate and Intervention by the South African Reserve Bank

Abstract

Purpose

The study has a twofold aim. The first is to assess whether the interventions explain the short-term fluctuations of the exchange rate of the rand and interest rate in South Africa. The second is to confirm whether intervention shocks transmit to the exchange rate and interest rate settings.

Methodology

Data from 1975 to 2020 was collected from the World Bank's website. The research used the Vector Autoregression (VAR) model to investigate the relationship between interventions, the exchange rate of the rand, and interest rates. FEVD was also employed to examine whether intervention shocks have discernible effects on both the interest rate and the exchange rate of the rand.

Findings

The evidence identifies that reserve growth positively and significantly influences the exchange rate, indicating that intervention causes the depreciation of the rand. However, the reserve growth has a negative and insignificant impact on the interest rate, indicating that intervention was unable to explain the interest rate set by SARB. The significance of the cumulative effects on the exchange rate is evidence that the interventions explain the short-run stabilization of the exchange rate.

Conclusion

In conclusion, the findings of this analysis highlight a clear impact of interventions on exchange rates, while concurrently revealing a lack of statistically significant influence on interest rates. This research offers a policy that can inform future policy decisions related to interventions and the broader monetary framework governing the rand exchange rate.