Monetary economics

QUESTION 1 [20] Read the extract and answer the question that follows: SA Reserve Bank raises repo rate to 6.75% Governor of the SA Reserve bank Lesetja Kganyago has announced that the bank will raise the repo rate to 6.75% from 6.5%. The rates call was made at a media briefing in Pretoria. The repo rate is the benchmark interest rate at which the central bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the rate banks use as a starting point to calculate interest rates for their clients. With the repo rate at 6.75%, the prime lending rate will increase to 10.25%. The decision was a close call. Kganyago said that three members of the bank's monetary policy committee preferred an unchanged stance, while three voted for a 25 basis point hike. Ahead of the announcement, analysts had been divided over whether the central bank would hike the rate or keep it unchanged. As Bloomberg reported on Wednesday, 11 of the 21 economists in its latest survey predicted an increase of 25 basis points to 6.75%. The rest said the rates would be kept unchanged. The governor said SA's domestic growth outlook remained challenging. The bank has slightly downgraded its GDP growth rate for 2018 from 0.7% to 0.6%. Kganyago said the central bank was looking at four 25 basis points hikes by the end of 2020. This would bring the repo rate to 7.5% by the end of 2020. Just before the start of Kganyago's address, the rand was trading at R13.84/$. After the announcement the rand strengthened to R13.74 to the greenback. Source: https:/www.fin24.com/Economy/South-Africa/reserve-bank-keeps-repo-rate-unchanged-at-675-201901 17 Question Analyse the impact that the repo rate increase will have on the long-term interest rate transmission mechanism. Do you agree with the decision of the SARB to increase the repo rate? Motivate your answer by considering how increasing the repo rate could assist monetary policy to reach its ultimate goal of price stability