M.Comm. / Under the previous accommodation system the monetary policy of the South African Reserve Bank failed to operate by means of open market transactions, and interest rate movements was solely the discretion of the South African Reserve Bank and was driven by means of the traditional Bank rate. The need for a more efficient and transparent accommodation system that is based on open market transactions and determined by demand and supply of liquidity was evident, and therefore the introduction of the repurchase agreement system in March 1998 was unavoidable. The ultimate objective of monetary policy is to achieve price stability, i.e. to ensure that the Reserve Bank has a goal of maintaining inflation at a level that would be more or less in line with the average rate of inflation in the economies of South Africa's major trading partners and international competitors. It is important that the Reserve Bank enhances transparency for the effective operation of an inflation-targeting framework. Transparency introduces predictability and helps to ensure that market expectations are consistent with the objective of price stability. The level of interest rates in a country can influence price stability directly. A transparent monetary policy will mean that changes in short-term interest rates should not surprise the market. Markets should anticipate decisions taken by the Reserve Bank and therefore transparency should promote the predictability of monetary policy. Since its implementation, the current accommodation system (repurchase agreement) has raised some concerns regarding transparency. The government's new monetary policy framework of inflation targeting also has some limitations that can influence the achieving of such targets. The one influences the other, and if interest rates and inflation is not managed transparently, it will have a severe impact on the overall efficiency of monetary policy in South Africa.

Monetary policy in South African is the primary means by which the authorities can influence activity in the overall economy. The South African Reserve Bank accommodates banks through repo transactions for which they charge the repo rate. The most important market in the transmission of the repo rate to the rest of the economy is the interbank market. As such, a detailed discussion of this market is given. In September 200 I the monetary authorities made certain adjustments to the repo system of accommodation, which included changing the repo rate from a floating rate to a fixed rate that would be administratively determined by the MPC. This was done to address certain weaknesses in the floating rate system. This thesis examines and compares the period before and after the adjustments to the repo system, with the aim of determining whether or not the monetary authorities achieved the goals intended from making this change. The repo rate, prime interbank rate, 3-month NCO rate and the prime lending rate are analysed using the Engle-Granger two variable approach and an ECM model to test for causality. It was found that the monetary authorities did not achieve their intended goals as the relationship between the repo rate and the interbank rate was more significant in the first period. Furthermore, the direction of causality the authorities hoped to achieve by implementing the changes were in fact already in place. As such the adjustments to the system changed the transmission mechanism from the one desired by the authorities to one that was not intended. The conclusions reached by this study show that, in terms of the objectives of the monetary authorities, the previous repo system functioned better. / KMBT_363 / Adobe Acrobat 9.54 Paper Capture Plug-in