Navigating inflation and interest rates
Imagine you are planning a family vacation. You budget carefully, but over time, you notice that prices for flights, hotels, and even food keep rising. This is inflation at work—it means your
money buys less than it used to. The same happens in the world of savings and investments. Let’s say you diligently put a part of your income aside every month. You are proud to see your
money grow, only to find that the price of your grocery basket or the house or car you dreamed about, increased too.
Why is understanding inflation and interest rates important?
Understanding how inflation impacts your savings, and how it interacts with the level of interest rates, can help you make smarter financial decisions and protect your savings from losing
value. You want your savings to grow more than the rate that prices increase. Inflation is the gradual increase in the prices of goods and services over time. There are several key reasons
for this phenomenon. First, as economies grow, demand for goods and services often outpaces supply, leading to higher prices. Second, costs for businesses, such as wages and raw
materials can rise, prompting companies to pass these increased expenses onto consumers. Inflation can also be driven by external factors like supply chain disruptions or geopolitical
events which affect the availability of goods. Together, these dynamics contribute to the continuous rise in prices that we experience over time.
One of the key roles of central banks, like the Bank of Namibia, is to control inflation by adjusting the level of interest rates. When inflation is high, central banks increase interest rates
to slow down the demand for goods and services, which then slows down spending and increases the price of borrowing money (to spend), Conversely, to encourage borrowing and
spending during a time when economic growth and inflation is low, central banks can lower interest rates to boost the economy again.
How can a Money Market Fund help you to grow and protect your savings?
Now, let’s talk about a practical way to grow and protect your savings: investing in a money market unit trust fund, such as the Sisedi Money Market Fund. The main goal of money market
funds is to offer a higher-level income than bank deposits and money on call. These funds offer a balance of stability, liquidity, and competitive real returns, making them a good option during
uncertain economic times. Money market funds invest in a basket of short-term, low-risk, high-quality financial assets. You can easily access your money when you need it, unlike some
long-term fixed investments. Experienced fund managers actively monitor market conditions and spread the investments across various instruments to optimise returns and reduce risk.
For example, in a rising interest rate environment, money market funds quickly adjust to offer better returns than traditional fixed savings accounts. The converse is true, but here’s what’s really important to make an informed decision: choose a way of saving that consistently delivers a return higher than the inflation rate.
Money market funds offer numerous benefits and are part of your broader investment strategy. They provide a valuable tool for short-term financial goals or as a temporary parking spot for
your money, but may not be suitable for all long-term investment objectives or saving for retirement. Remember, it is always wise to consult with an independent financial advisor to
ensure your investment choices align with your personal financial goals and risk tolerance. With the right strategy, tools and understanding how inflation and interest rates affect your
investments, you can confidently navigate the ever-changing economic landscape and grow and protect the value of your savings.
*Nasha Schiceya is a junior investment analyst at Sisedi Investment Group. She holds an honours degree in statistics and the Financial Modeling & Valuation certification.**
money buys less than it used to. The same happens in the world of savings and investments. Let’s say you diligently put a part of your income aside every month. You are proud to see your
money grow, only to find that the price of your grocery basket or the house or car you dreamed about, increased too.
Why is understanding inflation and interest rates important?
Understanding how inflation impacts your savings, and how it interacts with the level of interest rates, can help you make smarter financial decisions and protect your savings from losing
value. You want your savings to grow more than the rate that prices increase. Inflation is the gradual increase in the prices of goods and services over time. There are several key reasons
for this phenomenon. First, as economies grow, demand for goods and services often outpaces supply, leading to higher prices. Second, costs for businesses, such as wages and raw
materials can rise, prompting companies to pass these increased expenses onto consumers. Inflation can also be driven by external factors like supply chain disruptions or geopolitical
events which affect the availability of goods. Together, these dynamics contribute to the continuous rise in prices that we experience over time.
One of the key roles of central banks, like the Bank of Namibia, is to control inflation by adjusting the level of interest rates. When inflation is high, central banks increase interest rates
to slow down the demand for goods and services, which then slows down spending and increases the price of borrowing money (to spend), Conversely, to encourage borrowing and
spending during a time when economic growth and inflation is low, central banks can lower interest rates to boost the economy again.
How can a Money Market Fund help you to grow and protect your savings?
Now, let’s talk about a practical way to grow and protect your savings: investing in a money market unit trust fund, such as the Sisedi Money Market Fund. The main goal of money market
funds is to offer a higher-level income than bank deposits and money on call. These funds offer a balance of stability, liquidity, and competitive real returns, making them a good option during
uncertain economic times. Money market funds invest in a basket of short-term, low-risk, high-quality financial assets. You can easily access your money when you need it, unlike some
long-term fixed investments. Experienced fund managers actively monitor market conditions and spread the investments across various instruments to optimise returns and reduce risk.
For example, in a rising interest rate environment, money market funds quickly adjust to offer better returns than traditional fixed savings accounts. The converse is true, but here’s what’s really important to make an informed decision: choose a way of saving that consistently delivers a return higher than the inflation rate.
Money market funds offer numerous benefits and are part of your broader investment strategy. They provide a valuable tool for short-term financial goals or as a temporary parking spot for
your money, but may not be suitable for all long-term investment objectives or saving for retirement. Remember, it is always wise to consult with an independent financial advisor to
ensure your investment choices align with your personal financial goals and risk tolerance. With the right strategy, tools and understanding how inflation and interest rates affect your
investments, you can confidently navigate the ever-changing economic landscape and grow and protect the value of your savings.
*Nasha Schiceya is a junior investment analyst at Sisedi Investment Group. She holds an honours degree in statistics and the Financial Modeling & Valuation certification.**
