Download Monetary Policy - Diocesan College

Monetary policy: the measures taken by the
monetary authorities to influence the quantity
of money or the rate of interest with a view to
achieving stable prices, full employment and
economic growth.
Lesetja Kganyago
Interest rate: the rate at which interest is
charged on borrowed money or paid on saved
money.
Eg. if you borrowed R100 from the bank at an
annual rate of interest of 5%, how much would
you have to pay back after one year?
Repo rate: rate at which the SARB lends money
to commercial banks in the event of any
shortfall of funds.
VIDEO: he role of the South African Reserve
Bank in the South African economy
Real rate of return on saving = nominal (actual)
rate of interest - rate of inflation.
For example...
• A saver receives interest of 6% on his savings
• Inflation (general rise in prices) is 3% per year
• The real rate of return on these savings is only
_____%.
Is the economy growing or shrinking?
Interest rates can either stimulate or decrease economic activity.
Consumer confidence and business confidence
Large impact on how much consumers spend & businesses
invest.
Growth of wages
Higher wages can lead to inflation.
Exchange rates
A weaker exchange rate raises prices of imported goods/services.
Higher
interest rates
increase the
cost of
mortgages.
This reduces
the demand
for most
types of
housing.
House prices
will fall (or
rise at s
slower rate.
This will
affect
household
wealth which
decreases
consumer
spending.
This reduces
overall
demand and
slows
inflation.
Higher interest
rates increase
the cost of
mortgages.
Lower interest
rates decraese the
return of savers.
Income of
homeowners
falls.
Consumer
spending is
decreased.
Consumer
spending is
decreased.
This reduces
overall demand
and slows
inflation.
This decreases
overall demand
and slows
inflation.
Higher interest
rates increase
the cost
borrowing.
Higher interest
rates increase
the cost of
borrowing.
Income of
borrowers falls.
Credit spending
on durables
(cars kitchens
etc) decreases.
This reduces
overall demand
and slows
inflation.
This decreases
the potential
returns on
investment
Business
investment
decreases.
This reduces
overall demand
and slows
inflation.
VIDEO: What the SARB considers when setting
interest rates
VIDEO: What is Monetary Policy?