More importantly, perhaps, is the fact that using monetary policy to contain asset bubbles can be interpreted as a commitment to smoothing out asset price fluctuations, thereby dampening market signals and creating moral hazard. In light of the challenges involved, monetary policy should focus on the primary objective of pursuing price stability.
Although this will mean that interest rates in South Africa have been increased by 4 percentage points from the beginning of the year, this will in fact bring the banks ‘ real prime overdraft rate back to approximately the level prevailing during the first few months of 2002.