Mbabane: The elevated food and transport prices woes continues. The Central Bank of Eswatini has increased the discount rate by 100 basis points (1 percentage point) from 5 percent to 6 percent effective Thursday, September 23 2022.
This was announced by the bank through a statement issued after it held its mandatory Monetary Policy meeting. This meeting was held in the midst of geopolitical tension in the eastern Europe (Russian and Ukraine war) and other current economic developments, particularly the elevated food prices and transport prices effects.
“The MPCC noted that on the global front, GDP growth is now projected to stall with a focus of 3.2 percent in 2022 (from 3.6 percent in the April projection) and in the same vein advance economies expected to grow its economies by a lower 2.5 percent (from 3.3 percent). This is due to the slowdown in economic activity as a result of geopolitical tensions, rising inflation which could be harder to contain and tighter global financial conditions, amongst others.
Eswatini isn’t alone. Countries across the continent – and the world have also been hiking rates to manage rising prices. South Africa is the most recent country to hike rates as well. Others have included Ghana and Nigeria. And more hikes are expected in the coming weeks.
Personal finance perspective
From a personal finance perspective, increased interest rates have implications for anyone with a mortgage, vehicle financing and any other form of debt.
Higher interest rates translate to higher debt repayment. For instance, in Eswatini the monthly repayment on a E1 Million home loan, with a repayment term of 20 years, will increase from say E 8 997 to E 9 485.
Many households are feeling the financial pinch caused by the rising cost of living. Low income households are the most vulnerable to high food costs. But middle –income earners don’t fare any better.
A recent report on the by the statistics office highlighted that 40 percent of this cohort ‘s expenditure is allocated to food and 20 percent goes towards housing and utilities.
But the time to fix the roof is indeed good while the sun is still shinning. Before the economic situation goes from bad to worse, the impact of rising prices – and rising interest rates – can be mitigated in combination of ways.
Bad news savers
An interest rate cut is bad news for savers, but it is something of an unexpected gift for borrowers and investors.
Setting a high discount rate tends to have the effect of raising other interest rates in the economy since it represents the cost of borrowing money for most major commercial banks and other depository institutions.
This could be considered a contractionary monetary policy. Exactly how much a high discount rate affects the economy as a whole depends on the relationship between the discount rate and the normal market rate of interest for loans to banks.
In part, interest rates represent the cost of borrowing money. When it is less expensive for banks to borrow money from the Central Bank, they can subsequently charge less interest on their own loans. This has a ripple effect on the demand for loanable funds everywhere unless the market rate of interest is equally as high.
Interest rates also coordinate savings in the economy. When too few actors want to save money, banks entice them with higher interest rates. Between savings and loans, interest rates help coordinate economic activity between different actors and different points in time.
Savings represent a preference for future consumption over present consumption, while the opposite is true for borrowing. If the discount rate is raised too high, it could throw this coordinating mechanism out of balance.
More immediate impacts are felt from a high discount rate. Loans are more expensive, and borrowers have to work to pay off loans more quickly. This has the effect of taking money out of the economy, which could also cause prices to decline.
Individuals are encouraged to save more. This leads to an increase in capital funding. Whether this helps or harms the economy depends on many other factors and is very difficult to gauge.
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