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Interest Rate Case Study

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Monetary authorities utilise the short-term interest rate as an instrument for controlling the supply of money and managing liquidity in the banking sector, this refers to monetary policy, which strive to keep inflation stable and to promote economic growth. Monetary policy is conducted by the central banks in many countries and employs the short-term interest rate as the main operational variable. A change in short-interest rate (monetary policy's main instrument) lead to a change in other interest rate such as personal loan interest rate, home loan interest rate, etc. For example, a decision by central bank to cut down short-term interest rate will tend to cause other interest rates to decline and hence, induce economic growth. In contrary, when central bank tightens monetary policy by raising short-term interest rate, banks will typically increase their interest rates by similar or closely related amount. This will reduce inflation and limit the…show more content…
Repo rate is the price that banks pay for borrowing cash from the reserve bank. Repo rate is the official interest rate of reserve bank, and also it is utilised as the operational variable of monetary policy in South Africa. Favourable outcome of reserve bank's operational procedures require shortage of cash reserves in the banking system that compel banks to borrow cash from reserve bank. There is a positive relationship between the repo rate and other interest rate. A change in repo rate will cause a change in other short-term and long-term interest rates. Changes to official rate have indirect impact on inflation expectations, bank credit extension, the money supply and the total output. More importantly, official rate is used as an instrument to limit inflation. This can be performed by monetary policy committee by adjusting the repo rate

2. Manipulating cash
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