Final answer:
The SARB aims to maintain inflation within the target range of 3 to 6% through an instrument known as inflation targeting. While a negative inflation rate is undesirable, the reasons include broader economic implications beyond just lowering prices. Inflation targeting is practiced by many central banks worldwide, with the notable exception of the Federal Reserve, which has a dual mandate that includes unemployment.
Step-by-step explanation:
The main objective of the South African Reserve Bank (SARB) is to maintain price stability. Now, regarding the statements about the instruments that the SARB uses to achieve this goal. First, it is correct that the SARB aims to maintain the inflation rate within a target range, specifically between 3 to 6%. This practice of inflation targeting is a common monetary policy strategy used by various central banks around the world to keep inflation low and stable. Secondly, while the SARB seeks to prevent extreme inflationary or deflationary pressures, it is not entirely accurate to suggest that the SARB would ensure that a negative inflation rate (deflation) is not attained merely because it decreases prices. The concerns about deflation are broader, including potential negative effects on economic growth and consumer spending, as deflation may encourage consumers to delay purchases.
Inflation targeting has become a widespread approach since the 1990s, legally obligating central banks in several countries, such as Brazil, Canada, and the United Kingdom, among others, to focus on keeping inflation rates low. A significant exception is the Federal Reserve in the United States which has a dual mandate to consider both inflation and unemployment. The South African Reserve Bank, like others practicing inflation targeting, adjusts monetary policy instruments such as interest rates to steer inflation towards the target range.
Moreover, maintaining price stability is not the sole consideration for central banks. Other economic goals such as minimizing the risk of exchange rate fluctuations and encouraging both domestic and international competition are also vital. The Federal Reserve in the U.S., for example, has had to balance inflation control with other economic considerations, adjusting monetary policies during different economic periods to stave off potential high inflation or to stimulate the economy.