A great time to buy into the stock market is now because of what happened

Hello there,

In case you missed it, BoB has decreased the Monetary Policy Rate down from 2.40% to 2.15%. This MPR is also known as interest rate. Basically this is adjusting the supply of money in the economy to achieve a combination of inflation and output stability [source: International Monetary Fund]

And I will show you tonight how that affects share price.

During the media briefing, Governor Cornelius Dekop said that inflation of the country stands at 3.1% but could rise because of international commodity prices increasing beyond current focus, supply and logistical constraints persists, geo-economical fragmentation escalates higher and prices controlled by the government.

The BoB tries to avoid high inflations above 6% but at the same time avoids having an economy that is behind on productivity. So at this point it is time for the central bank to help the economy boost, how? by lowering interest rates.

How does this work?

1st stage: Recession

Let’s say the economy is in a recession; lay-offs, consumers are spending less, no investing in new capacity by companies, companies are having tight spreadsheets, productivity is low, borrowing money is expensive because of high interest rates, so this leads to central banks lowering the interest rates to boost the economy [source; International Monetary fund]

2nd stage: lowering interest rates

The central bank lowers interest rate, this makes borrowing money from banks cheaper such as FNBB lower as they stated on their Facebook page that prime lending rates will go from 6.51% to 6.26%. This means more money supply in the economy, employment rising, more workforce, people spending in the economy buying consumer goods, economy nearing full capacity. [source International Monetary fund]

Don’t think that all this Chema Chema funds, Thuoletlotlo, Temoletlotlo initiatives are the government trying to be friendly and kind, this is an economic move for everyone to boost productivity since it is so low.

3rd stage: Increase in inflation

But with all that spending then comes rise in prices of goods and input costs. Inflation happens now since a lot of money will be chasing little supply of goods so demand driven inflation rises, causing goods to be expensive, and making life a bit hard to cope. This leads to the central bank increasing interest rates to make borrowing expensive, as banks and corporates don’t borrow money.

So the central government tries by all means to make sure there’s a balance not to fill the economy to the brim or full capacity but also make sure to achieve economic growth by decreasing interest rates, it depends on the economic condition.

How all this affects shares now

When interests rates decrease, share prices rise but when they rise, share prices fall. When there’s a decrease in interest rates then share prices rise because of rise in cash flow stability, businesses have more money to invest, they can borrow at cheaper prices. [Investopedia ]

It’s like a yin-yang, and it takes 12 months for a change in interest rates to have a widespread economic impact, but the stock market’s response is often immediate [source:Investopedia]So if you invest you will see your investment in shares rise.

Now if you are going to save money in the bank, or buy bonds, well you might see lower yields on your returns compared to if you invest in shares. But whichever shares you invest in, make proper research and have a good night/day.