The Reserve Bank met with representatives of South African banking institutions this morning to review certain aspects of the implementation of the Bank's accommodation system through repurchase transactions (repo system). There was general consensus that this system is serving the needs of the banking sector well, and the repo rate has become a very useful instrument of monetary policy in the present environment of volatile international capital flows. It was made clear to the banks that the size (or level) of the daily liquidity requirement should not be regarded as an important indicator of Reserve Bank policy on short-term interest rates. Instead, the Bank signals its intentions to the market through the amount offered by the Bank at the daily tender for repurchase transactions, relative to the estimated overall liquidity shortage in the market. From the experience of the past year with the implementation of the repo system, it has become apparent that the signalling procedures that were originally adopted did not always convey clearly to the market in which direction and to what extent the Reserve Bank wanted the repo rate to move. In an attempt to improve the transparency of the Reserve Bank's signals, it was decided that the Bank would in future apply the following more finely defined signalling procedures: A full provision of the estimated daily liquidity requirement of banks will indicate a neutral position in which the Reserve Bank endorses the current direction and extent of interest rate movements in the market.A marginal under-provision/over-provision in the estimated daily liquidity requirement in the market when interest rates are declining/increasing will indicate that the Reserve Bank is of the opinion that the repo rate should stabilise at the prevailing level.A significant under-provision/over-provision in the estimated daily liquidity requirement will indicate that the Reserve Bank would like to see the repo rate moving to a higher/lower level. The magnitude of the under-provision/over-provision would indicate to the market the extent of the desired movement in the repo rate, i.e. the larger the amount of under-provision/ over-provision, the larger will be the desired adjustment in the repo rate.Auctions with a predetermined fixed interest rate will be applied only under very exceptional circumstances where the Bank wants to attain an immediate and substantial change in money market interest rates, for example, to absorb a sudden and large external shock as was experienced in May 1998. ​