You are employed at an Economics consulting firm called Eco Xcel. You have been approached by a client who read the article below entitled, “Another big hike raises South African interest rates near pre-Covid levels” and who has very limited understanding of monetary policy and how it works. He has asked you to write a report that provides some clarity on Monetary Policy in the context of the South African economy. JOHANNESBURG (Reuters) -South Africa’s central bank delivered another big interest rate hike on Thursday, taking its main lending rate back near pre-COVID levels as it battles to bring inflation back to target. The South African Reserve Bank (SARB) raised its repurchase rate by 75 basis points (bps) to 6.25%, in line with the forecast of the majority of economists polled by Reuters. The rand pared gains against the U.S. dollar after the decision was announced, as some traders had positioned for a larger hike. The SARB has now raised rates for the sixth time in a row, adding a total of 275 bps to the repo rate since its latest tightening cycle began in November 2021. Analysts said they expected the SARB to raise rates by a smaller margin at its final monetary policy meeting of the year in November. “If the Reserve Bank raised rates by 50 basis points, I think we should be near the end of the rate hiking cycle,” said Tertia Jacobs, a Treasury economist at Investec, adding that hiking rates beyond that level could take policy into restrictive territory. The five-member Monetary Policy Committee (MPC) was split 3-2 in its latest decision, with three members preferring a 75 bps increase and two wanting a 100 bps hike. That two MPC members preferred a more aggressive move took some economists by surprise, given that August inflation dipped to 7.6% year on year from 7.8% in July on the back of lower fuel prices. The SARB targets inflation of between 3% and 6%. “A failure to deal with inflation now would be detrimental to the economy down the line. And that is what our focus is,” Bank Governor Lesetja Kganyago told a news conference. Although the central bank did not alter its predictions for 2022 economic growth and inflation markedly, it stressed that a number of risks to the inflation outlook loomed large. Further price shocks could come from Russia’s war in Ukraine, electricity and wage agreements, the bank said in its MPC statement. But Kganyago told reporters that a lot could change between now and the November meeting given volatile economic and financial conditions. The same client has also asked you to provide him with a detailed explanation of fiscal policy in South Africa. In particular, the client would like to know the following: Q.2.1 What is fiscal policy and how does it differ from monetary policy? Q.2.2 What is the main instrument of fiscal policy? Provide some information regarding this instrument and how it works in the South African economy.
You are employed at an Economics consulting firm called Eco Xcel. You have been approached by
a client who read the article below entitled, “Another big hike raises South African interest rates
near pre-Covid levels” and who has very limited understanding of
works. He has asked you to write a report that provides some clarity on Monetary Policy in the
context of the South African economy.
JOHANNESBURG (Reuters) -South Africa’s central bank delivered another big interest rate hike on
Thursday, taking its main lending rate back near pre-COVID levels as it battles to bring inflation
back to target.
The South African Reserve Bank (SARB) raised its repurchase rate by 75 basis points (bps) to
6.25%, in line with the
The rand pared gains against the U.S. dollar after the decision was announced, as some traders
had positioned for a larger hike.
The SARB has now raised rates for the sixth time in a row, adding a total of 275 bps to the repo
rate since its latest tightening cycle began in November 2021.
Analysts said they expected the SARB to raise rates by a smaller margin at its final monetary policy
meeting of the year in November.
“If the Reserve Bank raised rates by 50 basis points, I think we should be near the end of the rate
hiking cycle,” said Tertia Jacobs, a Treasury economist at Investec, adding that hiking rates beyond
that level could take policy into restrictive territory.
The five-member Monetary Policy Committee (MPC) was split 3-2 in its latest decision, with three
members preferring a 75 bps increase and two wanting a 100 bps hike.
That two MPC members preferred a more aggressive move took some economists by surprise,
given that August inflation dipped to 7.6% year on year from 7.8% in July on the back of lower fuel
prices.
The SARB targets inflation of between 3% and 6%.
“A failure to deal with inflation now would be detrimental to the economy down the line. And
that is what our focus is,” Bank Governor Lesetja Kganyago told a news conference.
Although the central bank did not alter its predictions for 2022
markedly, it stressed that a number of risks to the inflation outlook loomed large.
Further price shocks could come from Russia’s war in Ukraine, electricity and wage agreements,
the bank said in its MPC statement. But Kganyago told reporters that a lot could change between
now and the November meeting given volatile economic and financial conditions.
The same client has also asked you to provide him with a detailed explanation of fiscal policy in
South Africa. In particular, the client would like to know the following:
Q.2.1 What is fiscal policy and how does it differ from monetary policy?
Q.2.2 What is the main instrument of fiscal policy? Provide some information regarding
this instrument and how it works in the South African economy.
In an effort to counteract growing inflation, the SARB has increased interest rates. This is the sixth consecutive increase since November 2021. The SARB's commitment to preserving price stability is seen in this monetary policy decision. Contrarily, fiscal policy, which is controlled by the national budget, has a distinctive effect on its economy. To further assist social and economic goals, the government makes decisions on taxing and spending.
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