Reference no: EM132550425

On May 1, 2020, a phased lifting of the lockdown began, allowing a few sectors to resume operation and others only partially. On May 13, a further relaxation of the lock-down was announced eective June 1 allowing some additional economic activities to take place, as well as a reduction of restrictions outside of the large metropolitan areas. Remote work is still encouraged where possible. Net capital out flows (bonds and equities) since the beginning of the pandemic have amounted to $6.7 billion (2.4 percent of GDP); the sovereign's dollar credit spread has more than doubled to 385.7 bps; and the rand has depreciated by 25 percent vis-a-vis the US dollar (IMF 2020).

There have been a number of monetary policy interventions to reduce the impact of the economic and nancial shocks that have impacted the economy negatively. The central bank (SARB) reduced the policy rate by 100 bps to 5.25 percent on March 19, another 100 bps to 4.25 percent on April 14, and then 50 bps to 3.75 percent on May 21. On March 20, it announced measures to ease liquidity conditions by: (i) increasing the number of repo auctions to two to provide intraday liquidity support to clearing banks at the policy rate; (ii) reducing the upper and lower limits of the standing facility to lend at repo-rate and borrow at repo-rate less 200 bps; and (iii) raising the size of the main weekly renancing operations as needed. On March 23, the government announced the launch of a unied approach to enable banks to provide debt relief to borrowers. On March 25, the SARB announced further measures to ease liquidity strains observed in funding markets. The program aims to purchase government securities in the secondary market across the entire yield curve and extend the main renancing instrument maturities from 3 to 12 months. On March 28, it announced temporary relief on bank capital requirements and reduced the liquidity coverage ratio from 100 to 80 percent to provide additional liquidity

Question:

With the aid of the monetary model of exchange rate determination, and assuming price fexibility in the economy, analyse the impact of the Reserve Bank's accomodating monetary policy on the balance of payments accounts, holding all other variables constant.