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You have probably heard that the Bank of Zambia has reduced the Monetary Policy Rate (MPR) by 250 basis points.

To some, this is straight.

To others, like Thee Band members, this is complete gibberish.

So I’m trying to prepare a small write-up to help Thee Band members sound cool whenever someone raises the MPR.

But this won’t be easy, considering that the band members are aged 5, 7 and 12.

So help me God.

Me to Thee Band

You guys know I work for a bank, right?

Think of a bank as a big piggy bank where people bring their money for us to keep safe.

What we then do is take some of that money and lend it to other people who need money.

But we don't just give it away, we ask them to pay back what we gave them plus a little extra.

That extra money is called interest.

Now, because I know Thee Band's attention span is limited, I'd turn this into a small song:

🎵 Banks are big piggy banks,

They keep our money and lend it to other people,

And they make an interest...

Papapa, talala! 🎵

Now, back to the talk.

In Zambia, we have a Bigger Piggie Bank. It is called the Bank of Zambia.

Let's call him Mr BOZ.

One of the things Mr BOZ does is influence how much it costs to borrow money and he usually gives banks ideas around the direction of interest rates to charge every customer.

One of the main tools he uses to do this is called the Monetary Policy Rate.

Or, because we are now members of Thee Band...

Cousin MPR.

Cousin MPR doesn't directly tell every bank exactly what interest rate to charge every customer, instead it is like a signal from Mr BOZ about the direction he wants interest rates and financial conditions to take.

So, when Mr BOZ wants to make borrowing more expensive and cool things down, he can increase Cousin MPR.

When he wants to make borrowing conditions less expensive, he can reduce Cousin MPR.

And because people who work at Mr BOZ like to sound cool, instead of saying “percentage points,” they often talk about basis points.

Here's the cheat code:

100 basis points = 1 percentage point.

So:

250 basis points = 2.5 percentage points.

Which brings us to today's assignment.

Mr BOZ has reduced Cousin MPR by 250 basis points.

Task for Thee Band:

1. What percentage-point reduction is 250 basis points?

2. Since I like borrowing money from the big piggie banks, how do you think I feel?

And more importantly...

What might this mean for the cost of borrowing?

That, my children, is where economics starts getting interesting.

Because sometimes...

Cousin MPR doesn't just live at Mr BOZ.

Sometimes, Cousin MPR eventually finds its way into our pockets, our loans, our businesses, our family budgets and now it’s found itself as your task for the day.

And that...

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