Hello and welcome to today’s frank conversation. Last week, we talked about ‘the endowment effect’. To enjoy the full detail, click on the blue tab below.
Today, we move on to ‘Monetary Policy’.
Monetary policy is like the conductor of a choir or an orchestra, guiding the economy's rhythm and flow. It's a powerful tool used by the central bank of a nation to do several things which include controlling the supply of money and influencing interest rates. This control over money by the central bank affects how much it will cost you to borrow, to save, and even spend. You want to know more about central banks, click the blue tab below.
So, why is understanding monetary policy crucial for our financial intelligence?
Firstly, monetary policy has a direct impact on interest rates. When the central bank wants to boost the economy, they might lower interest rates to make borrowing cheaper. This means you can get loans for things like buying a car or starting a business at a lower cost or interest. When the cost of borrowing is increased or interest rates raised, it eventually leads to less money supply within the economy.
Secondly, understanding monetary policy helps us make better financial decisions. When interest rates change, it affects our ability to save and invest. For example, when interest rates are low, saving in traditional bank accounts will not earn much, so you should explore other investment opportunities. Having this knowledge empowers you to make choices that work best for your financial goals.
Moreover, monetary policy also plays a big role in the value of the currency. When the central bank prints too much money, also known as ‘quantitative easing,’ it will lead to inflation, prices of goods and services will rise and the value of the currency decreases. This can affect your everyday life, impacting the cost of everyday essentials. Being aware of how monetary policy impacts inflation helps you plan for the future and protect your purchasing power.
Additionally, keeping an eye on monetary policies help you anticipate economic changes. For instance, if the central bank hints at raising interest rates, it might be a sign of an upcoming economic slowdown. Understanding these signals can give you a head start in adjusting your financial strategies and prepare for and scaling over potential challenges. Now, that is financial intelligence.
‘‘How terrible it will be for those who make unfair laws, and those who write laws that make life hard for people’’.
Isaiah 10:1 NCV
It's interesting how citizens of a nation hear and read about their centrall banks monetary policy without grasping the reality of how it concerns them. It's like a piece of news about what the CBN is doing or not, period. Imagining that I have to pay closer attention to monetary policy in regard of investment, financial decisions...is something one needs to get used to.