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ECS3701 Assignment 2
(COMPLETE ANSWERS)
Semester 1 2025 - DUE 9
May 2025
NO PLAGIARISM
[Year]
,Question 1 (a) According to this excerpt, with the recent monetary policy
stance on keeping the repo rate unchanged, what effect will this have on the
economy. Will this monetary policy approach have a positive, negative or a
more neutral effect on the economy? Explain your answer. [5]
1. Continuation of Lower Borrowing Costs
Although the repo rate was not lowered further, it remains at a historically low level
(7.5%) due to previous cuts.
This means loans remain relatively affordable for businesses and consumers.
Lower borrowing costs encourage borrowing, investment, and spending—key drivers of
economic growth.
2. Policy Certainty and Stability
By keeping the repo rate steady, SARB provides a sense of policy stability to markets,
investors, and consumers.
Predictability in interest rates helps businesses plan and make investment decisions more
confidently.
3. Support for Economic Growth
The SARB has explicitly stated that the rate decision is intended to “support economic
activity.”
This shows the central bank remains committed to fostering conditions conducive to
recovery and long-term growth.
4. Stimulus Effect Continues
The cumulative effect of previous rate cuts continues to filter through the economy.
Consumers may still benefit from lower debt repayment costs, freeing up income for
other spending.
Businesses may take advantage of lower financing costs for expansion and operations.
, 5. Encouraging Consumer and Business Confidence
A stable and supportive monetary policy stance improves overall confidence in the
economic outlook.
Confident consumers are more likely to spend, and confident businesses are more likely
to hire and invest.
6. Inflation Under Control
Keeping the rate steady suggests inflation is not a current threat.
This allows SARB to prioritize growth without risking price instability, maintaining a
healthy balance.
Conclusion:
The SARB’s decision reflects a cautiously optimistic stance that supports economic activity
while maintaining monetary discipline. Therefore, the monetary policy approach is likely to have
a positive effect on the economy overall.
Understanding the Repo Rate and Its Impact:
The repo rate is the rate at which a country's central bank (such as the South African Reserve
Bank or Federal Reserve) lends money to commercial banks. It's a key tool of monetary policy
used to control inflation, manage economic growth, and stabilize the currency.
When the repo rate is kept unchanged, it means the central bank has decided not to raise or
lower interest rates at the moment. The effects of this can vary depending on the current
economic context.
General Implications of Keeping the Repo Rate Unchanged:
Neutral Effect: If inflation is stable and economic growth is moderate, keeping the rate
unchanged often reflects a neutral stance — the central bank sees no urgent need to
stimulate or cool down the economy.
Positive Effect: It can be viewed as positive if the unchanged rate supports economic
stability, maintains consumer and business confidence, and encourages steady borrowing
and investment.
Negative Effect: However, it could also be seen as negative if inflation is high and the
unchanged rate is not sufficient to curb rising prices, or if the economy is slowing and the
unchanged rate fails to stimulate activity.
ECS3701 Assignment 2
(COMPLETE ANSWERS)
Semester 1 2025 - DUE 9
May 2025
NO PLAGIARISM
[Year]
,Question 1 (a) According to this excerpt, with the recent monetary policy
stance on keeping the repo rate unchanged, what effect will this have on the
economy. Will this monetary policy approach have a positive, negative or a
more neutral effect on the economy? Explain your answer. [5]
1. Continuation of Lower Borrowing Costs
Although the repo rate was not lowered further, it remains at a historically low level
(7.5%) due to previous cuts.
This means loans remain relatively affordable for businesses and consumers.
Lower borrowing costs encourage borrowing, investment, and spending—key drivers of
economic growth.
2. Policy Certainty and Stability
By keeping the repo rate steady, SARB provides a sense of policy stability to markets,
investors, and consumers.
Predictability in interest rates helps businesses plan and make investment decisions more
confidently.
3. Support for Economic Growth
The SARB has explicitly stated that the rate decision is intended to “support economic
activity.”
This shows the central bank remains committed to fostering conditions conducive to
recovery and long-term growth.
4. Stimulus Effect Continues
The cumulative effect of previous rate cuts continues to filter through the economy.
Consumers may still benefit from lower debt repayment costs, freeing up income for
other spending.
Businesses may take advantage of lower financing costs for expansion and operations.
, 5. Encouraging Consumer and Business Confidence
A stable and supportive monetary policy stance improves overall confidence in the
economic outlook.
Confident consumers are more likely to spend, and confident businesses are more likely
to hire and invest.
6. Inflation Under Control
Keeping the rate steady suggests inflation is not a current threat.
This allows SARB to prioritize growth without risking price instability, maintaining a
healthy balance.
Conclusion:
The SARB’s decision reflects a cautiously optimistic stance that supports economic activity
while maintaining monetary discipline. Therefore, the monetary policy approach is likely to have
a positive effect on the economy overall.
Understanding the Repo Rate and Its Impact:
The repo rate is the rate at which a country's central bank (such as the South African Reserve
Bank or Federal Reserve) lends money to commercial banks. It's a key tool of monetary policy
used to control inflation, manage economic growth, and stabilize the currency.
When the repo rate is kept unchanged, it means the central bank has decided not to raise or
lower interest rates at the moment. The effects of this can vary depending on the current
economic context.
General Implications of Keeping the Repo Rate Unchanged:
Neutral Effect: If inflation is stable and economic growth is moderate, keeping the rate
unchanged often reflects a neutral stance — the central bank sees no urgent need to
stimulate or cool down the economy.
Positive Effect: It can be viewed as positive if the unchanged rate supports economic
stability, maintains consumer and business confidence, and encourages steady borrowing
and investment.
Negative Effect: However, it could also be seen as negative if inflation is high and the
unchanged rate is not sufficient to curb rising prices, or if the economy is slowing and the
unchanged rate fails to stimulate activity.
