- When the economy slows down, central banks will lower interest rates to improve economic activity and growth of the country.
- A lower interest rate will lower borrowing costs so that individuals and businesses are more eager to invest and spend.
- Changes in interest rates have consequences across the economy, including mortgage rates and property sales, consumer credit and spending, and stock market fluctuations.
Who controls interest rates
- The central bank of a country controls interest rates.
- Changing interest rates to stimulate or slow the economy is part of monetary policy including money supply and interest rates.
- Governments are in charge of fiscal policy, which includes tax adjustments and government expenditure.
Impact on Stocks
- Higher market interest rates can have a negative impact on the stock market and vice versa.
- When the Fed raises interest rates, the cost of borrowing money increases for public and private enterprises.
- Higher costs and fewer businesses may result in reduced revenues and profitability for public companies over time, affecting their growth rate and stock values.
- As the FOMC announces a rate hike, traders may sell stocks and move into more defensive investments.
Impact on Bonds
- Bond prices move inversely to interest rates, as rates fall, bond prices rise.
- Lower interest rates have a direct impact on the bond market, as yields on everything from US Treasuries to corporate bonds fall, making them less appealing to new investors.
- An increase in interest rates causes bond prices to fall. People are less likely to borrow or refinance existing debts as interest rates rise because it is more expensive.
- An increase in interest rate reduces consumer spending as they may not be willing to take out their money from banks. They will choose to save their money in the bank to get a higher return.
- Consumers will spend less, reducing demand for goods and services. When demand for goods and services falls, businesses reduce production, laying off workers and increasing unemployment. An increase in interest rates slows the economy overall.
- Consumers can buy on credit at a lower cost Consumers will spend less, reducing demand for goods and services. When demand for goods and services falls, businesses reduce production, laying off workers and increasing unemployment. An increase in interest rates slows the economy overall.
- Whereas, when interest rates go down, consumers can buy on credit at a lower cost. This means that they will only have to repay at a lower amount.
- Interest rate increases cause the inflation rate to decrease.
- When interest rates rise, goods and services become more expensive because the cost of borrowing becomes more costly. As a result, consumers spend less, lowering the demand for goods and services. When demand falls, prices fall as well, lowering inflation.
Potential challenges brought by rCBDC
- Increasing cyber security and software risks.
- Power/network outages during extreme weather events increase the risks of economic vulnerability.
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