Is the South African Reserve Bank Influenced by Exchange Rates when Setting Interest Rates?

This paper analyses the extent to which the South African Reserve Bank (SARB) uses the repo rate in response to exchange rate depreciations. We use a Vector Autoregression to model the simultaneous linkage between the real effective exchange rate and the policy rate. A combination of short-run and sign restrictions are used to identify the model. Our results show that currency depreciation is important in monetary policy interest rate setting. The exchange rate also reacts significantly to changes in the repo rate.