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6 ways BOG's monetary policy rate affects you

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Depending on what the rate is at a particular time, the monetary policy rate has a rippling effect on almost every aspect of the economy and essentially the quality of life of citezens.

 
 

Below are 7 ways  the monetary policy rate affects you

1. Cost of borrowing increases

Every adjustment in the policy rate has a direct corresponding effect on the interest rate at which businesses and individuals get loans from the banks. This means the higher the Monetary Policy rate, the higher the interest you will likely pay on your loan acquired from the bank.

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2. Cost of servicing loans

The monetary policy rate also affects the rate you pay on servicing loans you have already acquired.  For example, if you acquire a loan at the rate of 27% in March 2016, which will be 1% more than the policy rate, and the policy rate increases to 30% in April, you will pay 3% more on the interest rate you were required to pay when you first contracted the loan at 27%

3. Inflation Rate

Inflation rate is the rate at which prices of goods and service increase at a particular time. And the monetary policy rate affects the rate of inflation, quite simply because if business are made to pay more or less on loans, the extra cost is likely to be passed on to the consumer in the form of higher prices.

Same way if the monetary policy rate decreases and banks are made to pay lower prices on their loans, prices of goods and services are likely to be maintained or even reduced.

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4. Availability of Credit

When the monetary policy is reduced, banks are more willing to grant loans to companies. This means that you are more likely to get a loan and also at a cheaper interest rate if the monetary policy rate is reduced.

5. Increased Employment

Under a reduced monetary policy rate, businesses are  likely to expand with ease, because of access to cheap credit or loans  to expand. This is likely to boost employment, increase revenue and tax payable to government.

6. Increases Inflation

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On the downside, a decreased monetary policy rate will increase the supply of money in the system, increasing both demand induced inflation as well as supply- induced inflation.

This is due to the fact  businesses are in the position to produce more, and consumers are, on their part, in a better position to buy more .

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