Is There a Compelling Case to Increase the SARB Holdings of Government Securities to Supplement Interest Income and Neutralise Losses Due to Foreign Investments and Foreign Currency Reserves Accumulation?

Is there a compelling case to increase the South African Reserve Bank (SARB) holdings of government securities to supplement interest income and neutralise losses due to foreign investments and foreign currency reserves accumulation? Evidence in this chapter establishes that there is. We find that an increase in SARB holdings of government securities exerts downward pressure on the repo rate, Treasury Bill rate, ten-year yields, the term spread and government debt costs. An increase in the SARB holdings of government securities lowers domestic government bond yields and risk, and loosens the domestic financial conditions and the fiscal constraints. Evidence shows that an increase in the SARB holdings of government securities results in the appreciation of the R/US$ exchange rate, and lowers inflation outcomes and expectations. These factors assist the SARB in achieving its price stability mandate. Furthermore, positive shocks to the SARB balance sheet assist in achieving macro-economic stability as they result in an increase in GDP growth, investment growth and employment growth and a decline in the unemployment rate and the Gini coefficient. Positive shocks to the SARB balance sheet are transmitted via the supply-induced, reserve-induced portfolio signalling effect and the re-anchoring channels. Increasing the holdings of government bonds on the SARB balance sheet is consistent with its primary mandate of price stability and macro-financial stability. The size of the SARB balance sheet is another major monetary policy tool to complement the repo rate as a monetary policy tool.