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How monetary policy tools affect financial planning

In order to prevent inflation or deflation, which in turn affects business growth, employment, and net exports, monetary policies manage how money is supplied, how costs are regulated, and the value of the country's currency. The goal of monetary policy is to influence how the economy performs as measured by variables like the interest rate, inflation, employment, and economic output. It influences the economy's demand, including how ready consumers and businesses are to spend money on products and services.

The monetary policies of a country are those that control how that country manages its money supply, such as setting and controlling interest rates and exchange rates. Open market operations, the interest rate on reserves, and reverse repurchase agreement (reverse repo) are some of the tools that the government might employ to reach and maintain its target interest rate. This has a tendency to decrease the growth rate of the money supply when the government promotes this activity because it encourages financial institutions to deposit money back with the government,

Instruments/tools of government monetary policies

The government uses three main tools to regulate the cost, supply of money and the value of its currency. These are:

  1. Open market operations (OMO) - In this case, the central bank buys short-term government securities like Treasury bonds and Treasury bills, which inject more money into the economy, lower interest rates, and make loans considerably more accessible.

  2. Reserve requirements - This relates to the minimum quantity of liquid assets that a commercial bank must have i.e., to the bare minimum that a commercial bank must maintain in liquid assets. This is a very useful and effective instrument for shielding banks from unusual market shocks, and it may also have an impact on lending levels, deposit, and credit volumes, among other things.

  3. Discount rate is the interest rate that various financial institutions and commercial banks pay on short-term loans obtained from federal reserve or central banks. This helps to meet reserve requirements, which lowers the discount rates and the loan rate which in turn stimulates borrowing and raises a country's GDP.

How can we align our financial plans with monetary policies?

After analysing the impact of government monetary policies,it is prudent to align an organisation’s or a personal strategic financial plan with government monetary policies.

For instance, the effects of inflation risk must be included in a good financial plan And, this is especially true in Nigeria where the key sources of inflation include the exchange rate, insecurity, high energy prices among others. High and unpredictably rising inflation is detrimental to the economy as a whole, as well as any financial plan. Even though past experiences may not be able to anticipate where inflation is heading, they do offer a variety of possibilities that a sound financial plan should include. The danger of future inflation should be taken into account when deciding how much money you will need for retirement, your investing strategy, and your annual spending budget.

Every business should take some of these factors into account while establishing its financial plan:

  • Interest rates - Businesses should consider if the current government's monetary policies have a favourable interest rate when making financial plans since this might affect their loan requests and result in income for the planned budget.

  • Discounted cash flow (DCF) - Businesses should examine how the discount rate in monetary policy tools impacts their DCF in terms of their proposed investments and how their existing or anticipated future cash flow supports it.

  • Taxes - Businesses should examine how monetary policy impacts their tax obligations because if taxes rise, business activities start to slow down, and performance suffers.

  • Risks - Businesses should examine if the monetary policies have a restrictive movement (economic growth slows when banks restrict liquidity) that might raise the likelihood of businesses failing.

If you have a strategy in place, you might not need to make any significant adjustments to your investments or spending habits in reaction to events or short-term changes in monetary policy. A strong strategy should be in place, and you should seek the assistance of a financial adviser to help you carry it out. Trying to outsmart the market is never a good idea.

In summary, a company, while developing a budget, should examine how the government's monetary policies affect its financial goals. By doing so, the company may align its financial plans and avoid generating an unsustainable budget that could impede its operations and growth. Before making important decisions, consider seeking the opinion of an expert or financial adviser.

Our financial advisory specialist team can work with you and your business on your 2023 financial plans to give your business a strong head-start into the year.

Email us at: for a free consultation with our team specialists.

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