Have you ever wondered why everything from cars to sweets alongside the road is suddenly getting expensive?
In times of economic chaos, it can be challenging to stay ahead of the curve. One of my greatest mentors is a 90-year-old man who resides in the beautiful village of Ondeikela, my home village. He was a nurse by profession, and he had once told me that; for centuries, working hard and saving up diligently would have set you up for financial security and a comfortable retirement.
Today, the above statement is overruled by troubling economic times and the loss of value of money. Times when he took me on a tour of the nuts and bolts that used to hold the economy together and it all sounded like a fairy tale to me. Funny enough, most of my generation is yet to experience financial security. Retiring comfortably is not even yet a dream for my generation.
This is because, my generation is born in a new financial world – one where your savings lose value faster than you can build them, a global mountain of debt pilling up even higher, and most people slip backwards no matter how hard they try. This is because, the price of money and inflation have a unidirectional relationship running on a paraffin speed.
Inflation is currently at 6.3% and increase of 0.2% month on month. Using the concept of time value of money, our savings, if any, is losing its value over time.
We should never forget that money is a commodity just like any other. In the same manner you pay to buy a loaf of bread, money itself also has a price. This price is indicated by the interest rate you pay to borrow the money, which is usually a percentage of the capital lent to you. The easiest price of money to identify are those on mortgages bonds. When you sign a mortgage (Home loan), the price of this loan will be set specifically by the interest rate. The higher it is, the more expensive the loan is and the lower it is, the cheaper the loan. Academics refer to the price of money as the rate at which borrowers pay to access money and lenders get paid for providing money.
The price of money is set by central banks, like, the federal reserve bank in the US and South African Reserve in South Africa. The central bank of each country use price of money to control the supply of money in the economy and to stimulate or slow down economic growth. In Namibia, Bank of Namibia set the price at which money is bought and sold in Namibia.
Several factors determine the price of money including inflation, economic growth, politics, and market forces. Under fair circumstances, if you see the price of money increasing, it is it is the aforementioned factors that inform the Monetary Policy Committee (MPC) of the Bank of Namibia to react. The opposite is also true if the price of money decreases.
These prices are key for most financial products, such as loans or deposits. When prices are low, the return on deposits will be limited and if prices rise, the return will increase. The same goes for loans and mortgages. If the price is low, the cost of financing follow suits.
Now and then we see critics of repo increments on social media, complaining about the subject, it is because they fear that the increase will make their loans more expensive: the “price of money”. The most obvious consequence of prices of money are loans. The higher the price, the expensive the loans.
In conclusion, understanding the price of money is key to staying ahead in times of economic chaos. Thus, the importance of price of money in the household economy is obvious, so it is important to watch out for any changes in the market and to stay informed so you can make better financial decisions. One would also advise that as domestic economic players, we need to closely watch the economic trends of our mother market, South Africa.
*Trophy Shapange is a Managing Director at Hangala Capital Investment Management and can be reached at trophy@hangalacapital.com
