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Definition

A policy implemented by the Monetary Policy Committee (MPC) of the Central Bank to encourage economic growth through the money supply of a country. Stimulation can be done in four principal ways - (1) Open market operations where the Central Bank enters the money market and buys government bonds thus injecting money into the economy and removing bonds (which are not money). This is the least effective monetary stimulation and is used to compensate for temporary imbalances in the money supply. (2) Change the repo rate. The repo rate is the interest rate which the central bank charges to commercial banks. Commercial banks add the "mismatch factor" onto this (usually about 3,5%) in order to set the prime overdraft rate which they charge their best customers. By reducing the repo rate, the MPC can reduce all interest rates in the economy and so stimulate economic growth. (3) The Central Bank can also change the "reserve rate" which is the percentage of deposits which commercial banks must hold. A very small reduction of this rate results in a massive release of funds into the economy because all commercial banks are suddenly allowed to lend more. The South African Reserve Bank reduced the repo rate following the economic difficulties of COVID-19 to release about R320bn into the economy. (4) Quantitative easing (Q/E). This occurs where the Central Bank creates money which it then uses to buy government bonds directly thus financing government expenditure. The result is inevitably inflationary, but it has been used, especially in first-world countries to re-stimulate their economies, for example, after the 2008 sub-prime crisis and to a lesser extent after the COVID-19 pandemic.

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