Jerome Powell Christine Lagarde
Rate cuts, Fed and ECB towards the September “cut”. The economic-financial impacts
“The moment” for a rate cut, it is time to “adjust our policy. The direction to proceed is clear, and the timing and speed of the rate cut will depend on the economic data, the evolution of the outlook and the risks”: this is what the president of the Fed Jerome Powell in his long-awaited speech at Jackson Hole he said that the time has come for a change of pace regarding American monetary policy.
A speech that gave the signal that the markets had been expecting for some time, thus opening the doors to a first interest rate cut at the next meeting of the central bank, the September 17th and 18thA monetary easing that has already started in Europe June: after ten consecutive increases, the European Central Bank has decided to reduce the three key interest rates 0.25 percentage points. While on September 12 the owner of the Eurotower, Christine Lagardeis expected for the “encore”.
And if on the one hand, the moves of Fed and ECB were expected (and hoped for) by industry insiders, on the other hand we wonder: what implications will they have, more concretely, on the real economy, financing and investments? As explained by giornale.itthe easing of monetary policy makes the “cheaper” money. This, in concrete terms, means that central banks are giving breath to the GDP growth and for businesses this translates into lower financing costs going to encourage greater investments. consumersinstead, benefit from loans at more accessible rates for the purchase of durable goods (such as houses and cars). But not only that. For those who have a variable rate mortgagea rate cut translates into lower installments and therefore more money available for consumption. The effects on investment choices must also be considered. As the giornale.itwhile the actions and the raw materials tend to benefit from a falling rate environment, the bonds may see their yields decline. Here is a more detailed overview of the possible impacts of rate cuts on mortgages, stock market, businesses and raw materials.
The effect on mortgages
The lowering of interest rates for those who hold a variable mortgage simply means “lower rates”, while for those who intend to buy a property and ask for one from scratch “more advantageous conditions”. A situation that not only makes it more convenient managing family expenses but it could also stimulate an increase in surrogations. Accessibility to credit could also simplify the purchase of durable goods, proving to be a driving force for relaunching the internal demand.
Consequences on loans to families and financing to businesses
But not only mortgages. Significant effects will also be felt on loans to families and financing to businesses: the drop in interest rates makes credit more accessible, stimulating a growth in demand for personal loans which, in turn, also have a positive impact on consumption, giving oxygen to the businessesThe prospect of cheaper credit is an opportunity for companies, which will be able to benefit from lower financial charges and easier access to loans. In a context of lower interest rates, companies may find it easier to refinance existing debt and plan new investments, with positive repercussions on employment and economic growth.
The reaction for stocks and bonds
With the rate cut, the whole chapter on stocks and bonds opens up. As explained by giornale.itmonetary easing is seen as an assist for the actions, as listed companies benefit from lower financing costs. Among the sectors that do best during rate cuts are utilities and pharmaceuticals, while technology sectors tend to suffer. While for bondsexplains the giornale.it“interest rates and bonds have a inversely proportional relationship: when rates fall, bond prices rise; falling rates make it cheaper to borrow money and as a result, newly issued debt securities offer lower yields and become less attractive.”
Similarly, the newspaper further specifies, all products that remunerate liquidity such as deposit accounts and money market funds are losing their appeal. In this context, in order to find attractive returns there is a tendency to position oneself on the long end of the yield curve, that is, on maturities that are further away in time. For those who already have in their portfolio Btp & Co “the convenience of the investment remains intact, with the advantage that the price of the bond will increase; even in the case of bonds, the trend depends on the evolution of the economic cycle. In the case of recession Government bonds are better protected, while with a healthy economy corporate bonds tend to provide greater satisfaction”.
The effect on raw materials
A more complex chapter is the one concerning raw materials. As the analysis reported by giornale.it, when rates go down the dollar tends to weaken and this makes raw materials – which are quoted in the US currency – cheaper for international buyers. Especially for copper, nickel and zinc. On the other hand, a context of weakness economic tends to penalize them. A separate discussion must be made for gold, which already travels on all-time highs with an increase of over 20% since the beginning of the year. But in addition to the Fed effect, as expectations of lower interest rates in the medium-long termthe yellow metal will return to being a “safe haven”, especially in the face of an increasingly high-tension international geopolitical context.
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