Brussels – Not only Canada and the ECB: The Bank of Canada and the European Central Bank were the first to decide, with interest rate cuts on Dec. 11 and Dec. 12, respectively. Now, central banks in other continents will follow. The week that opens is under the banner of reducing the cost of borrowing money for banks, with positive repercussions on the cost of mortgages and loans for households and businesses. There is anticipation for the decision of the Fed, expected to announce a cut on Wednesday (Dec. 18). The Bank of Japan will announce its decision on Dec. 19 and China on Dec. 20. In Asia, a rate could be in the cards in China but not in Tokyo, where rates are expected to remain unchanged and likely increase in the new year.
The trend is general and generalized. The choices of major global and regional economies inevitably have a domino effect on other countries. So, again this week, Indonesia and the Philippines are expected to cut rates by 0.25 basis points. The case of Thailand is different, where rates are expected to remain unchanged. Not even Australia is ruling out rate cuts. In Europe, Sweden is expected to cut rates by 0.25 percentage points, while Norway (a non-EU country but in the European Economic Area) is leaning toward leaving things as they are.
The announced and expected decisions are in addition to those already made in other parts of the world. South Korea and New Zealand have already cut rates in late November, and, in the coming weeks, India could reason on easing monetary policy.
What an interest rate cut means
Reducing interest rates is nothing more than a decision to lower the cost at which central banks lend money to commercial banks. Borrowing money becomes cheaper, and this reduced cost is passed on to customers (individuals and businesses) when they apply for loans. It becomes less expensive and, therefore, more attractive to take out mortgages and make investments.
Shares and bonds
Speaking of investments, a reduction in interest rates affects the choices of those who want to invest some of their savings. Better stocks or bonds? In the present case, the decision to reduce borrowing costs shifts money. Stocks become more attractive than bonds, with savers more likely to invest in the stock market because bond yields fall while equities offer higher potential returns.
The rate cut for government debt
A reduction in interest rates also rewards governments as it reduces the cost of interest payable on the yield on their sovereign debt securities. For countries like Italy, with a high level of public debt relative to gross domestic product, lower rates ease the burden of repaying debt securities to bondholders.
English version by the Translation Service of Withub
