The central bank’s decision to increase the policy rate to 14.0% is a strategic move to help stabilize the economy by controlling inflation.

Purpose of Increasing the Policy Rate

The policy rate is essentially the interest rate at which commercial banks borrow from the central bank. By increasing this rate, the central bank is making it more expensive for banks to access funds. In response, banks typically pass on these costs by raising interest rates on loans for consumers and businesses. This higher cost of borrowing leads to reduced spending in the economy, as both households and companies tend to cut back on taking new loans or spending on goods and services.

Reducing spending is crucial to controlling inflation because high demand can drive prices up. The MPC’s goal is to lower inflation gradually, bringing it closer to the 6-8% target range, which is considered manageable for economic growth without excessive price increases.

Immediate Impacts on Consumers

When the policy rate goes up, consumers experience several noticeable effects:

• Higher Loan Costs: For those with variable-rate loans or new loans, monthly payments will likely increase. Mortgages, car loans, and personal loans will become more expensive, which may cause some consumers to reconsider taking on new debt.
• Reduced Disposable Income: With more income directed toward paying higher interest on debt, consumers may have less money to spend on discretionary items. This decrease in spending contributes to slowing demand across the economy, which is one way inflation is gradually brought under control.

Implications for Businesses and Employment

With higher borrowing costs, businesses also tend to pull back on expansion plans that would require loans, such as opening new branches, upgrading equipment, or hiring additional staff. This slowdown in business spending could result in fewer job opportunities or slower wage growth, impacting consumers indirectly.

For small businesses and startups, especially, higher borrowing costs can be challenging, as they often rely on loans for growth. In the short term, we might see a slower pace of business development, which can affect consumer choice and prices of goods and services as the market adjusts to these changes.Although these changes may feel restrictive in the short term, the policy is designed with long-term stability in mind.

Longer-Term Economic Benefits

Although these changes may feel restrictive in the short term, the policy is designed with long-term stability in mind.

• Reducing Inflation and Stabilizing Prices: By curbing spending, the central bank aims to control inflation gradually. Lower inflation means the cost of goods and services will stabilize over time, and consumers won’t face rapidly increasing prices for essential goods like food, fuel, and housing.
• Restoring Consumer Confidence: Stable prices foster consumer confidence. When people expect prices to remain predictable, they’re more likely to spend and invest, which is vital for sustained economic growth. By 2026, the goal is for inflation to decrease closer to the target range, which could make consumers feel more confident about their purchasing power.
• Attracting Investment: A controlled inflation rate and stable currency environment make the economy more attractive to investors, both local and foreign. This investment can lead to job creation and economic growth in the medium term, potentially benefiting everyone through improved employment opportunities and potentially higher incomes.Medium-Term OutcomesIf the policy achieves its targets, by 2026, we should expect:

Medium-Term Outcomes

 If the policy achieves its targets, by 2026, we should expect:

• Increased Purchasing Power: With inflation under control, consumers may find their money goes further, as prices become more stable. This stability in prices is essential for maintaining a balanced cost of living.
• Economic Growth with Stability: A lower inflation rate and a stable currency can foster a positive economic climate, which could lead to gradual but sustained growth. Consumers, by then, may feel the benefits in the form of increased job security, better wages, and access to a wider range of affordable goods and services.

Summary: How Consumers Will Feel This Impact

In the short term, consumers may feel the pinch of higher loan costs and less disposable income. They might delay large purchases or prioritize saving over spending. However, as the policy works to control inflation and stabilize prices, consumers can expect more predictable costs of goods and services, which supports financial planning and security. By 2026, the central bank’s current measures aim to create an economy with lower inflation, more stable prices, and a favourable environment for jobs and investments, which ultimately benefits households and businesses alike.