SARB makes surprise 100 bps cut in repo rate

Summary: On April 14, the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) unexpectedly announced another 100 basis points cut in interest rates, following an identical move in March. The central bank said it now expects the South African economy to contract by 6.1% in 2020. A downward revision in its inflation forecast for 2020 (close to the bottom of the 3%-6% target range), combined with this recession forecast, enabled the MPC to ease monetary policy further. In addition, the SARB indicated room for another 125 basis points cut in lending rates over the next 12 months.

Required:

1.1 Use an appropriate diagram to illustrate and explain the likely effects of reducing the repo rate on the economy in South Africa, assuming that the economy was initially operating at less than full employment. (10)

1.2 Explain whether the decision to reduce the repo rate in the context of Question 1.1 above is justified or not. (4)

1.3 Explain how fiscal policy can be used as an alternative for achieving the same results as those achieved in Question 1.1. (6)