There have been recent reports that government ministers were mulling over "freezing" the rand. This was later dismissed by outgoing Reserve Bank Governor Tito Mboweni as mere speculation and he assured that there were no such plans for the currency.

Freezing, or pegging, generally involves matching the value of a currency to another currency or basket of currencies. The idea behind this is to stabilise a currency’s value against the currency it is pegged to, making trade and investment more predictable because future currency fluctuations can be largely discounted.

China has pegged its currency, the yuan renmimbi, to the US dollar and reports say that this provided financial stability that helped Asia ride out a financial crisis in the region that began in 1997 and only started to mend two years later.

This also means that it cannot use domestic monetary policy, as South Africa does, to create a stable economy. Instead China buys or sells the yuan on the open market. If the exchange rate falls below the government's target, it buys its own currency off the market. This creates market demand and pushes up the value of the currency. If the yuan's value moves too high, it is sold off to create a market oversupply and drive prices down.

Critics of the system say that a peg is difficult to maintain in the long run. The system has even caused financial crises in Mexico and Russia where it was used, because governments could not meet demand to convert their local money into foreign currency at the pegged rate. Some say this is the reason the Asian financial crisis started in the first place.

The alternative to a pegged currency is to create a floating exchange rate, a system used by the South African Reserve Bank. This is often referred to as a 'self-correcting' system because if demand for a currency is low, its value will decrease and imported goods will become more expensive. This, in turn, stokes demand for local goods and services, creating more jobs and causing the currency’s value to automatically correct itself.

A floating exchange rate also allows for the use of monetary policy, such as inflation targets and changes in lending rates, to create a more stable economy.

The fact that the system is already self-correcting means that often very little intervention is required from central banks or government to ensure stability.

So while currency pegs can create a stable environment for trade and finances, it can only work if all major economies subscribe to it. This was the case in the late 19th century and early 20th century when most countries linked the value of their currency to gold.

Now that this practice has been largely abandoned, a floating exchange rate system is more preferable. It is not a fool-proof system but has been shown to create long-term stability in the market.

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