Interest rate hikes, interest rate cuts and interest rates
Interest rate hikes and interest rate cuts are Deposit and loan interest rates , change directly The liquidity of money in the market , the problem of more money and less money will affect the prices of assets such as houses, stocks, funds, etc., as well as the prices of consumer goods, which will in turn affect Your cost of living. almost Risk-free interest rate (US debt, Treasury bond interest rate) .
Monetary Policy
- Cutting interest rates: Stimulates the economy in the short term but causes inflation in the long term
- Raising interest rates: suppressing the economy in the short term and controlling inflation in the long term
Central banks control short-term interest rates
- The central bank raises and lowers interest rates, affecting short-term interest rates
- Quantitative easing QE and balance sheet reduction affect long-term interest rates (long-term interest rates are determined by market supply and demand)
- The Fed's main control is the overnight lending rate (federal funds rate)
- The central bank of China mainly controls a 7-day interest rate (7-day reverse repurchase rate) and the medium-term lending facility MLF
- Interest rate is not a number, it is a curve.
cut interest rates
Cutting interest rates and reducing reserve requirements create money by stimulating credit and strengthening the effect of the money multiplier.
- The main purpose: to stimulate the economy, increase the liquidity of money in the market, loosen currency, and stabilize market confidence.
- Stimulate the willingness to consume credit, with low interest rates on credit loans (buying cars and houses) and low interest rates on deposits.
- The more credit there is, the more money there is in the market
- Cutting interest rates reduces the financing costs of enterprises, allowing them to use funds at lower costs to expand production and increase employment.
- Deposits can easily flow into the stock market, promoting social financing
- Disadvantages: It is easy to mishandle interest rate cuts, which can easily cause asset prices to skyrocket, causing bubbles or inflation.
- Inflation: The Federal Reserve has been cutting interest rates due to the epidemic, and it is almost close to zero interest rates. Now inflation cannot be sustained, and it has to start raising interest rates, shrinking liquidity, and curbing inflation. .
- Asset price bubble: Real estate easily generates huge amounts of credit and creates huge amounts of credit money.
House prices have risen twice: in 2008 and 15 years later.- To combat the financial crisis caused by the subprime mortgage crisis in 2008, interest rates were cut four times in a row in 70 days.
- Interest rates were cut five times in 2015, and house prices doubled in most areas across the country from 2016 to 2018.
- Contributed to the bull market in 2009 and 2015
- China: Residents’ mortgage leverage is already very high, their spending power has weakened, and the positive effect of interest rate cuts has weakened. On the contrary, the negative effects of inflation increase. Therefore, if we want to stimulate the economy, we must be very cautious when cutting interest rates, but we must start from the most basic steps of increasing residents' income and increasing and improving employment.
- Failure: The economy continues to be depressed, unemployment is high, ordinary people are pessimistic about the future, and their willingness to borrow is very low. Consumers have no confidence and do not consume.
- Japan's long-term lack of consumer confidence has led to continued economic downturn and population decline. Japan’s mortgage interest rates are only a few tenths.
- Forced interest rate cuts: causing the rich to get richer (lower loan interest rates) and the poor to get poorer (harder loans, inflation).
- Compensating for interest rate hikes: When the positive effects of interest rate cuts weaken or have side effects
RRR cut
One of the main businesses of a bank is lending. Bank deposits must be deducted from reserves. The bank's revolving loan generates 8 times the money through credit.
- Reserves: Money that banks cannot use to lend
- Money multiplier: The number of times a reserve percentage can expand after being left in place. Ant Financial once used this to inflate its money 40 times.
- Reducing the reserve requirement ratio: Reducing the deposit reserve ratio can affect the size of the money multiplier, which in turn affects the amount of money in the market.
interest rate hike
Raising interest rates shrinks money by reducing credit and weakening the effect of the money multiplier.
- The main purpose: to resist the weakening of the positive effects or side effects of interest rate cuts, reduce the liquidity of money in the market, tighten currency, and earn interest on deposits in banks.
- The cost of credit increases, the willingness to credit weakens, and there are fewer loans and the inflated funds generated by these loans. Credit loan interest is high, and deposit interest is high (high-risk stocks are exchanged for low-risk deposits in banks).
- The increase in credit interest costs has led both individuals and capital to consider early repayment.
- After the Federal Reserve raised interest rates, capital sold assets in other countries for cash. These overseas assets relied on loans provided by U.S. banks to repay and reduce credit costs.
- One of the reasons why broad money M2 is so large has not triggered major inflation: currency liquidity is low, and Chinese people love to save money.
- Irony: What else can Chinese people spend besides buying houses? What else can Chinese people spend after buying a house?
- Timing of raising interest rates: It must be when the economy improves, employment rate, industrial index, etc.
- When the Federal Reserve raises interest rates and foreign capital continues to flow out, leading to a sharp depreciation of the national currency, it will be forced to raise interest rates, such as Turkey.
- The exchange rate of the domestic currency is basically determined by the relationship between supply and demand. When the demand for the local currency increases, the currency value rises; when the demand decreases, the currency value falls. When a country has a large outflow of capital, a large amount of domestic currency must be converted into foreign currency and then flee. The demand for domestic currency will decrease and the demand for foreign currency will increase, which will inevitably lead to the depreciation of the domestic currency relative to foreign currencies, that is, the decline in the exchange rate of the domestic currency.
- A large amount of foreign investment: For example, we went to the United States to build factories and invest. We need U.S. dollars, so we need to go to the foreign exchange market to exchange RMB for U.S. dollars. In this way, in the foreign exchange market, the supply of local currency increases, and the local currency naturally depreciates.
- Foreign capital outflow: For example, foreign-funded companies in China have withdrawn their capital, and the United States has closed their branches in China. Then he sells the company and gets a bunch of RMB, and then goes to the foreign exchange market to exchange for a bunch of US dollars, which increases the supply of RMB in the foreign exchange market and causes the country's exchange rate to fall.
- Forecasting interest rate hikes and cuts: RMB exchange rate and domestic inflation rate are very important factors
- Impact on life: Raising interest rates will curb inflation and cause high deposit interest
- Decline in financial assets: The capital market is very dependent on the liquidity of funds. The reduction in liquidity caused by interest rate increases will trigger a decline in the stock market.
- Decreasing housing prices: After interest rates are raised, housing prices and interest rates rise, the willingness to purchase real estate decreases, supply exceeds demand, and housing prices fall. The pressure to repay loans will also be greater, and many people will choose to sell their properties, further increasing market supply and causing housing prices to fall. The more selling, the faster the crash. Population decline will also affect housing prices.
The impact of interest rates on asset prices
- Interest rates and inflation: strong negative correlation (commodities)
- Interest rate cut: stimulate consumption
- Interest rate increase: deposit in bank
- Interest rates and bonds: strong negative correlation
- Raise interest rates: Bond prices fall. The government issues bonds at higher interest rates, and bonds with lower interest rates become less attractive, resulting in less demand and lower prices.
- Interest rates and stocks: weak negative correlation, quantitative easing has a great impact on the stock market.
- Company: Cut interest rates, reduce financing costs for enterprises, use funds at lower costs to expand production and increase employment
- Residents: Lower interest rates, lower mortgage and car loans, stimulate consumption
- Liquidity: Cut interest rates to increase the liquidity of market funds
- Valuation perspective: The stock price is the price of future cash flows discounted to the present. If interest rates are cut, the discount rate is low, and future money becomes more valuable now, and the price is high.
- Interest rates and real estate: Uncertain
- Interest rate cut: To buy a house with a loan, asset prices are prone to skyrocketing
- Interest rate hike: house prices fall and a large number of people sell their properties
- Interest rates and exchange rates: Positive correlation
- Interest rate cuts: low interest rates, capital outflows, currency depreciation, stimulating domestic economy and exports
- Interest rates and banks: positive correlation
- Interest rate hike: good for banks, which make money from the difference between lending and borrowing
- There is a positive correlation between bank stocks and 10-year Treasury bond interest rates