Structure and Mechanics of Financial Markets

Question 1

1.1 It is my opinion that interest rates should not be increased or reduced at a rapid pace, but continues to be increased or decreased as currently, at a more conservative and slow pace. Should the Governor follow the approach as requested by COSATU, and reduce the interest rate at a more rapid pace, the following could possibly happen (I’ve split my response in positives and negatives)

a) Positives

1.a.1. Citizens will have more cash in their pocket to spend on consumer goods.

1.a.2. As more goods are purchased, there will be a greater demand on goods and this could lead to job creation, reducing unemployment.

1.a.3. With more goods and jobs, this could lead to unemployed citizens being employed and being able to buy property, vehicles, technology etc., expanding the economy.

1.a.4. With a demand on properties and vehicles, this could lead to increased infrastructure and buildings, and attracting foreign investors into the country, i.e. maybe a new car manufacturer entering our market.

1.a.5. Citizens will be able to settle debt, and provide a better life for their families.

1.a.6. Families will be able to afford education, building a stronger educated country going forward.

1.a.7. As more taxes are being paid by newly employed workers, this could lead to teachers and doctors remaining in our country and possibly earning relevant remuneration.

1.a.8. As more taxes are being paid by newly employed workers, more tax will be injected into government, supporting the expenditure on infrastructure, striving for full employment and economic growth.

b) Negatives

1.b.1. If our interest rates are reduced at a rapid pace, then bonds will look less attractive to foreign investors as they are earning less on the reduced interest rate.

1.b.2. This will also have an impact on our exchange rate as investors will invest elsewhere where they receive a more favourable interest rate

1.b.3. If interest rates are too low, the economy will grow too...