[Year]
[Type the company name]
[ECS3701
Assignment 2
Semester 1
Memo | Due 9
May 2025]
[Type the abstract of the document here. The abstract is typically a short summary of the contents of
the document. Type the abstract of the document here. The abstract is typically a short summary of
the contents of the document.]
, ECS3701 Assignment 2 Semester 1 Memo | Due 9 May 2025. All questions
fully answered.
1. Read the following excerpt from News24 below and answer the questions
that follow. The inflation and inflation expectation is better today; we
lowered borrowing costs and this will support economic activity. However,
risks to domestic inflation and growth have risen markedly since the start of
the year,” Kganyago said. The South African Reserve Bank kept the key
interest rate unchanged at 7.5% last month after three successive 25 basis
point cuts because of the extreme levels of uncertainty as trade tensions
escalate. “With the recent softening in inflation, the Sarb has cut interest
rates by a cumulative 75 basis points since September 2024, reducing the
degree of policy restrictiveness,” the central bank said in a statement on X.
“Given the upside risks over the medium-term horizon, the current monetary
policy stance is deemed appropriate.” Source: Uncertainty risks higher rates,
says Reserve Bank 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. B)
Given the interest rates cut in the previous months, do you think the South
African Reserve Bank (SARB) took a good decision to now keep rates on hold
due to global trade tensions and uncertainty? Explain your answer through
the transmission mechanism and discussing how interest rates cut affect
trade and therefore aggregate output and price stability.
A) Effect of the Monetary Policy Stance on the Economy
The decision to keep the repo rate unchanged at 7.5% will likely have a neutral effect on the
economy, at least in the short term.
Positive Effects: By lowering borrowing costs through previous rate cuts, the South
African Reserve Bank (SARB) has made credit more affordable, which could stimulate
economic activity, encouraging businesses and consumers to borrow and spend more.
This can support investment and consumption, potentially boosting aggregate demand.
Negative Effects: However, the statement mentions that risks to domestic inflation and
growth have risen due to escalating trade tensions and global uncertainties. These
external risks could lead to higher imported inflation or disrupt supply chains, which
could increase costs for businesses and consumers. If inflation expectations rise, the
central bank may face pressure to raise interest rates in the future to curb inflation,
potentially leading to a negative effect on growth.
Neutral Effect: Given the softening in inflation mentioned in the text, the SARB has
taken a cautious stance, suggesting that its current monetary policy is appropriate for the
time being. This means the monetary policy stance may not significantly alter economic
[Type the company name]
[ECS3701
Assignment 2
Semester 1
Memo | Due 9
May 2025]
[Type the abstract of the document here. The abstract is typically a short summary of the contents of
the document. Type the abstract of the document here. The abstract is typically a short summary of
the contents of the document.]
, ECS3701 Assignment 2 Semester 1 Memo | Due 9 May 2025. All questions
fully answered.
1. Read the following excerpt from News24 below and answer the questions
that follow. The inflation and inflation expectation is better today; we
lowered borrowing costs and this will support economic activity. However,
risks to domestic inflation and growth have risen markedly since the start of
the year,” Kganyago said. The South African Reserve Bank kept the key
interest rate unchanged at 7.5% last month after three successive 25 basis
point cuts because of the extreme levels of uncertainty as trade tensions
escalate. “With the recent softening in inflation, the Sarb has cut interest
rates by a cumulative 75 basis points since September 2024, reducing the
degree of policy restrictiveness,” the central bank said in a statement on X.
“Given the upside risks over the medium-term horizon, the current monetary
policy stance is deemed appropriate.” Source: Uncertainty risks higher rates,
says Reserve Bank 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. B)
Given the interest rates cut in the previous months, do you think the South
African Reserve Bank (SARB) took a good decision to now keep rates on hold
due to global trade tensions and uncertainty? Explain your answer through
the transmission mechanism and discussing how interest rates cut affect
trade and therefore aggregate output and price stability.
A) Effect of the Monetary Policy Stance on the Economy
The decision to keep the repo rate unchanged at 7.5% will likely have a neutral effect on the
economy, at least in the short term.
Positive Effects: By lowering borrowing costs through previous rate cuts, the South
African Reserve Bank (SARB) has made credit more affordable, which could stimulate
economic activity, encouraging businesses and consumers to borrow and spend more.
This can support investment and consumption, potentially boosting aggregate demand.
Negative Effects: However, the statement mentions that risks to domestic inflation and
growth have risen due to escalating trade tensions and global uncertainties. These
external risks could lead to higher imported inflation or disrupt supply chains, which
could increase costs for businesses and consumers. If inflation expectations rise, the
central bank may face pressure to raise interest rates in the future to curb inflation,
potentially leading to a negative effect on growth.
Neutral Effect: Given the softening in inflation mentioned in the text, the SARB has
taken a cautious stance, suggesting that its current monetary policy is appropriate for the
time being. This means the monetary policy stance may not significantly alter economic
