From July through November 2001, the monetary base (better known as M0), which is the quantity of real money actually produced by the Reserve Bank, increased from R40.3 billion to R45.9 billion. That is an increase of 13.8 percent over four months, which if continued for a year would result in an annual increase of close to 50 percent. Part of the increase in M0, R1.75 billion, was to accommodate an increased need by commercial banks for reserves due to a change in official reserve requirements. Allowing for this, the effective change in M0 from July through November was over 9.5 percent, which is over 31 percent in annualised terms.
But it did not stop there. The figures for December showed a further one-month increase of 6.56 percent. Over the five-month period from July to December 2001, M0 increased by 21.3 percent adjusted for required reserve changes, the effective rate is 16.5 percent. That corresponds to an annualised nominal growth rate of 59 percent, and an adjusted rate of 44 percent, which is a huge dose of cash for any economy to absorb. It should be no wonder that the rand has fallen in an almost mirror-like fashion.
When M0 increases significantly, the general price level tends to go in the same direction. All prices, including exchange rates, are affected in the same way, and will tend to be higher than they would have been. That is why price indices, such as CPI and CPIX, tend to move in the same direction as the rand prices of foreign currencies. Exchange rates respond to changes in the monetary base, and usually do so more quickly than do other prices.
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