ECS3701
Assignment 2 Semester 1 2023
Unique Number:....767135
Due Date: ……… 3 May 2023
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2.01. Read the following excerpt from Business Tech below and answer the
questions that follow:
“South Africa’s central bank said it will continue using interest rates to curb
inflation, and responded to calls for its mandate to explicitly include promoting
economic growth and creating jobs by saying monetary policy already targets
those indicators.
At 6.25%, the Reserve Bank’s repurchase rate is still below long-term levels
and in expansionary territory, Governor Lesetja Kganyago said in a speech in
Johannesburg on Tuesday.
The consequences of the central bank loosening its grip on inflation and falling
behind global peers as rates are being normalized would be “too costly,” he
said.
“The best chance we have with monetary policy to get faster, more job-rich
growth is to maintain our focus on price stability with flexible inflation targeting,
a proven framework.””
, QUESTION 2.01
“South Africa’s central bank said it will continue using interest rates to
curb inflation, and responded to calls for its mandate to explicitly
include promoting economic growth and creating jobs by saying
monetary policy already targets those indicators.
At 6.25%, the Reserve Bank’s repurchase rate is still below long-term
levels and in expansionary territory, Governor Lesetja Kganyago said in
a speech in Johannesburg on Tuesday.
The consequences of the central bank loosening its grip on inflation and
falling behind global peers as rates are being normalized would be “too
costly,” he said.
“The best chance we have with monetary policy to get faster, more job-
rich growth is to maintain our focus on price stability with flexible
inflation targeting, a proven framework.””
(a) As an economist, what advice would you give the South African
Reserve Bank (SARB) regarding the continuous increase in
interest rates? In your answer indicate whether you think the
SARB MPC is doing the right thing. Explain why and what can be
done better, if any. If you believe this move is correct, explain why
you think this is so.
Repo rate is used by monetary authorities to control inflation.
An increase in the short-term interest rates means that monetary policy is
contracting (contractionary monetary policy)
In the event of inflation, central banks increase repo rate as this acts as a
disincentive for banks to borrow from the central bank. This ultimately reduces
the money supply in the economy and thus helps in arresting inflation.
However a continuous increase in interest could hamper the economy. If rates rise
too quickly, they may disrupt economic planning, discourage investment, and
unnerve financial markets. The markets are interconnected, so if one input changes
too quickly, it dislocates other areas. For example, if interest rates were to rise very
quickly, it would yield dramatic, negative effects on bond prices and currencies, and
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