Factors Which Influence a Change in the Repo Rate

Introduction:

The South African Reserve Bank aims to regulate the economy through monetary policy; one of the measures put in place to enable this is the setting of the repo rate. The repo rate directly affects the supply of money in South Africa which in turn influences consumer spending power, debt levels, business growth and inflation. The repo rate is a catalyst for inflation and price levels experienced in the economy. In this research essay we look at the various factors affecting the repo rate and inflation.

1. Reserve bank projections relating to inflation

Gill Marcus has indicated that inflation has expected to rise on average 0.1% towards the end of 2013 to 5.9% to reflect a full inflation after a breach in the third quarter at 6.3%. According to historical CPI rates, inflation has steadily been rising in 2013 mainly due to the rising prices of electricity and oil and their substantial increase in CPI weighting. This higher inflation forecasts has lead us to believe that the Reserve Bank is keeping the repo rate stable in an attempt to stabilize inflation and encourage future growth.

2. Demand pull inflation in relation to consumer sentiment

The repo rate affects the interest rate charged to consumers by commercial banks, should the repo rate decrease, the supply of money will increase. This encourages business growth and consumer spending as money can be borrowed at a cheaper rate. However, an increase in the money supply makes currency more vulnerable to inflation. When the repo rate is increased, money supply decreases and this keeps inflation down but discourages business growth and consumer spending.

3. The exchange rate and the demand for higher interest rates

The rand has fallen 21percent against the dollar since the beginning of 2013. The weak exchange rate has overtaken the oil price as the main upside risk to the inflation rate. The positive effect of the weak rand is that imports will decrease and exports will increase. The...