The decision by the Monetary Policy Committee (MPC) to increase the interest rate by 75 basis points to 5.50% per year will have an impact on the money market in South Africa. The money market refers to the market for short-term debt instruments, such as Treasury bills, commercial paper, and certificates of deposit.
The increase in the interest rate will make it more expensive for banks to borrow money from the central bank, which will lead to an increase in the cost of borrowing for consumers and businesses. This will cause a decrease in the demand for credit, as borrowing becomes less attractive.
As a result, the supply of money in the money market will increase, while the demand for money will decrease. This will cause the interest rate to rise further, as banks compete to lend out their excess funds. The diagram below illustrates this relationship, with the supply of money increasing and the demand for money decreasing, leading to an increase in the interest rate.