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ECS3701 ASSIGNMENT 2 (UNIQUE 833704) SEMESTER 1 2024
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ECS3701 ASSIGNMENT 2 (UNIQUE 833704) SEMESTER 1 2024. Due date 29 April 2024 PASS WITH DISTINCTION - FORTIS PASSUM
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, 2.1
The South African Reserve Bank (SARB) has a number of instruments at its disposal to lessen the
impact of inflation brought on by outside shocks such as the Russian invasion of Ukraine. In order to
regulate inflation, these tools mainly concentrate on regulating interest rates and the money supply.
The three primary instruments at SARB's disposal are:
Interest rates under monetary policy: The repo rate, or interest rate at which it lends money to
commercial banks, is modifiable by the SARB. Bank borrowing costs rise as the repo rate rises, which
drives up lending rates for individuals and companies. This can therefore reduce investment and
consumption, thereby reducing inflationary pressures. Lowering the repo rate, on the other hand,
encourages borrowing and expenditure, which may increase economic activity. Open Market
Operations: The SARB can purchase or sell government securities on the open market using OMO.
The SARB adds funds to the banking system through the purchase of government securities, which
increases liquidity. As a result, interest rates may drop, encouraging borrowing and expenditure that
will boost the economy. On the other hand, selling government assets raises interest rates and
decreases liquidity, which can limit inflationary pressures and expenditure.
Reserve Requirements: The percentage of deposits that banks must retain as reserves rather than
lend out is subject to change by the SARB. By lowering the amount of money banks can lend, raising
the reserve requirement helps to control inflation and expenditure. On the other hand, lowering
reserve requirements can promote lending and business expansion.
Although these instruments can effectively control inflation, the economy may suffer as a result of
them as well:
Economic Growth: Raising interest rates and tightening monetary policy in an effort to fight inflation
may impede economic growth. Increased borrowing costs could deter consumers and investors,
which would lower economic activity and jobs.
Exchange Rates: Exchange rates are subject to monetary policy decisions. Raising interest rates, for
example, in an effort to combat inflation may draw in foreign capital and cause the value of the
home currency to rise. By lowering the cost of imports, this can help control inflation, but it may also
hurt export competitiveness, which would affect export-dependent companies.
Debt Servicing: As interest rates rise, it becomes more expensive for individuals, companies, and the
government to service their current debt. This may put a pressure on finances and cause
expenditure in other sectors of the economy to decline, which could slow down growth.
Asset Prices: The value of stocks and real estate can be impacted by monetary policy decisions. As
investors seek for greater profits, lower interest rates could cause asset prices to rise, possibly
resulting in asset bubbles. The deflation of asset prices, on the other hand, can have a negative
effect on consumer confidence and household wealth.
The execution of these policies necessitates careful assessment of their possible negative
consequences on economic development, currency rates, debt servicing, and asset prices, even
though the SARB has a variety of measures at its disposal to battle inflation.
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