ECS3701
ASSIGNMENT
2 2025
A+
QUESTION 1
a.
The decision by the South African Reserve Bank (SARB) to keep the repo rate unchanged at 7.5%
after previously lowering it by 75 basis points reflects a cautious but supportive monetary policy
stance. This approach is likely to have a positive effect on the economy for the following reasons:
1. Lower borrowing costs: The recent interest rate cuts mean that loans are cheaper, which can
encourage businesses to invest and consumers to spend. This stimulates economic activity.
2. Support for economic growth: SARB explicitly mentions that the rate cuts will “support
economic activity. ”This suggests that even though the rate has now been held steady, the
overall policy direction is still geared toward encouraging growth.
5/9/2025
, QUESTION 1
a.
The decision by the South African Reserve Bank (SARB) to keep the repo rate unchanged at 7.5%
after previously lowering it by 75 basis points reflects a cautious but supportive monetary policy
stance. This approach is likely to have a positive effect on the economy for the following reasons:
3. Lower borrowing costs: The recent interest rate cuts mean that loans are cheaper, which can
encourage businesses to invest and consumers to spend. This stimulates economic activity.
4. Support for economic growth: SARB explicitly mentions that the rate cuts will “support
economic activity. ”This suggests that even though the rate has now been held steady, the
overall policy direction is still geared toward encouraging growth.
5. Inflation under control: With inflation softening and expectations improving, SARB has some
space to avoid overly tight policy, which would otherwise slow down the economy.
6. Stability in uncertain times: By pausing further rate changes amid global trade tensions and
rising risks, the central bank is providing predictability and stability, which is crucial for
investment and planning in uncertain conditions.
7. Overall sentiment: Keeping the rate unchanged while already having cut rates signals a
balanced and responsive policy approach — supportive of recovery while remaining cautious of
inflation. Therefore, the recent monetary policy approach is positively impacting the economy
by promoting growth while keeping inflation expectations in check.
b.
Yes, the South African Reserve Bank (SARB) took a prudent decision to keep interest rates on hold
after previous cuts, given rising global trade tensions and economic uncertainty. Through the
monetary policy transmission mechanism, a cut in the repo rate reduces commercial interest rates.
This encourages borrowing and spending by consumers and businesses, leading to an increase in
aggregate demand and output (Y). It also weakens the exchange rate (ER), making South African
exports more competitive and imports more expensive, which boosts net exports (NX) and further
raises output.
However, while rate cuts stimulate the economy, a falling exchange rate can lead to imported
inflation—as the cost of imported goods rises, so does the general price level (P). Thus, a continued
drop in interest rates could risk overheating the economy and raising inflation, especially during a
time of global instability.
By pausing rate cuts, the SARB is allowing the economy to absorb previous monetary easing while
also guarding against inflationary pressure caused by a weaker rand and costlier imports. Given the
uncertainty in global trade, this cautious approach balances the goal of stimulating growth with the
need to maintain price stability. Therefore, the SARB’s decision is appropriate and responsible.
QUESTION 2
ASSIGNMENT
2 2025
A+
QUESTION 1
a.
The decision by the South African Reserve Bank (SARB) to keep the repo rate unchanged at 7.5%
after previously lowering it by 75 basis points reflects a cautious but supportive monetary policy
stance. This approach is likely to have a positive effect on the economy for the following reasons:
1. Lower borrowing costs: The recent interest rate cuts mean that loans are cheaper, which can
encourage businesses to invest and consumers to spend. This stimulates economic activity.
2. Support for economic growth: SARB explicitly mentions that the rate cuts will “support
economic activity. ”This suggests that even though the rate has now been held steady, the
overall policy direction is still geared toward encouraging growth.
5/9/2025
, QUESTION 1
a.
The decision by the South African Reserve Bank (SARB) to keep the repo rate unchanged at 7.5%
after previously lowering it by 75 basis points reflects a cautious but supportive monetary policy
stance. This approach is likely to have a positive effect on the economy for the following reasons:
3. Lower borrowing costs: The recent interest rate cuts mean that loans are cheaper, which can
encourage businesses to invest and consumers to spend. This stimulates economic activity.
4. Support for economic growth: SARB explicitly mentions that the rate cuts will “support
economic activity. ”This suggests that even though the rate has now been held steady, the
overall policy direction is still geared toward encouraging growth.
5. Inflation under control: With inflation softening and expectations improving, SARB has some
space to avoid overly tight policy, which would otherwise slow down the economy.
6. Stability in uncertain times: By pausing further rate changes amid global trade tensions and
rising risks, the central bank is providing predictability and stability, which is crucial for
investment and planning in uncertain conditions.
7. Overall sentiment: Keeping the rate unchanged while already having cut rates signals a
balanced and responsive policy approach — supportive of recovery while remaining cautious of
inflation. Therefore, the recent monetary policy approach is positively impacting the economy
by promoting growth while keeping inflation expectations in check.
b.
Yes, the South African Reserve Bank (SARB) took a prudent decision to keep interest rates on hold
after previous cuts, given rising global trade tensions and economic uncertainty. Through the
monetary policy transmission mechanism, a cut in the repo rate reduces commercial interest rates.
This encourages borrowing and spending by consumers and businesses, leading to an increase in
aggregate demand and output (Y). It also weakens the exchange rate (ER), making South African
exports more competitive and imports more expensive, which boosts net exports (NX) and further
raises output.
However, while rate cuts stimulate the economy, a falling exchange rate can lead to imported
inflation—as the cost of imported goods rises, so does the general price level (P). Thus, a continued
drop in interest rates could risk overheating the economy and raising inflation, especially during a
time of global instability.
By pausing rate cuts, the SARB is allowing the economy to absorb previous monetary easing while
also guarding against inflationary pressure caused by a weaker rand and costlier imports. Given the
uncertainty in global trade, this cautious approach balances the goal of stimulating growth with the
need to maintain price stability. Therefore, the SARB’s decision is appropriate and responsible.
QUESTION 2
