This Year, Over 20 Countries Have Cut Interest Rates. Analysis Of The Impact Of Monetary Policy Changes On Capital Market

The global "interest rate cut tide" is becoming more and more intense. As of August 12, 2019, more than 20 countries, including the United States, New Zealand, Australia and other developed countries, cut interest rates one after another.

Faced with the change of global monetary policy represented by "reducing interest rates", Xiao Bai investors may understand: what is monetary policy? What means does the central bank regulate monetary policy? What is the impact on the market (stock market / bond market / exchange market)? What should we pay attention to in investing?

What is monetary policy?

Monetary policy is the policies, policies and measures adopted by the central bank to control and regulate money supply and credit volume in order to achieve its specific economic objectives.

As we all know, in a healthy economic system, everyone is creating their own value while enjoying the services provided by others. So what is the currency in it? Money is actually the "lubricant" of the economic system. Just like a blacksmith who specializes in producing hammers, he goes to a restaurant to eat. If there is no money, he may need to use his hammer to go to the restaurant for dinner.

With the help of money, the blacksmith can sell the hammer to those who really need it, and then use the money to enjoy the service of the hotel. Hotels can also use the money they earn to pay staff salaries and upstream suppliers' payments. In the "lubrication" model of such a currency, social needs are better matched and satisfied, and the efficiency of exchanging goods and services has also been effectively improved.

It should be pointed out that, as a lubricant, although money does not create value in itself (strictly speaking, it only has the function of exchange / storage / price tag), the amount of money supply will play a role in the steady use of the economic system, such as the importance of lubricants for maintaining the normal operation of the mechanical system.

What is the level of money supply to be maintained?

According to the theory of economics, if the money supply can maintain a matching growth level (moderate inflation) according to the economic growth, it will have positive significance for the long-term and sustainable growth of a country's economy. Excessive money supply is bound to lead to the rapid depreciation of the currency and the emergence of hyperinflation. Zimbabwe is an example of the fact that there are numerous zeros in the currency, everyone is a "millionaire" who can not afford to eat enough, and prices are temporarily unstable at the same price. On the contrary, if the money supply is too low, it will lead to "deflation", low prices and inactive market transactions, which directly affect the enthusiasm of producers and the sustained economic growth.

Therefore, the central bank will adjust the money supply in the market through a series of measures to ensure sustained and steady growth of the economy, that is, monetary policy.

How does the central bank regulate monetary policy?

As mentioned above, the central bank plays an important role in regulating monetary policy and ensuring sustained and sound economic growth. What are the specific means of Adjusting monetary policy?

In practice, the central bank's main monetary policy adjustment measures include:

1. Open market operation The central bank, in the open market, purchases and sells some valuable securities to financial institutions such as big banks and other financial institutions, so as to achieve the recovery and delivery of money and liquidity management. Common open market operations include:

(1) buy back / reverse repurchase. The main securities of the operation are central banks. When the liquidity is needed, the central bank will be put in the market and the funds of the financial institutions will be recovered. The term is "buy back". When liquidity is needed, the central bank also uses funds to withdraw the central bank's votes from financial institutions, that is, "reverse repurchase". The terms of repurchase and reverse repurchase are usually 7 days, 14 days and 28 days, which are suitable for adjusting short-term liquidity in the market.

(2) medium term lending facility (MLF). As the name suggests, MLF is the central bank's monetary policy tool to regulate the medium-term base money. Capital investment is mainly based on pledge, which is provided by financial institutions such as treasury bonds, central bank bills, policy financial bonds, high-grade credit bonds and other high quality bonds as collateral for the central bank's funds. The term of MLF is usually 3 to 6 months, mainly for medium-term liquidity in the market.

In addition, financial institutions can apply for standing loan convenience (SLF) to the central bank in accordance with their liquidity needs, and obtain liquidity support with the central bank's "one to one" transaction.

2, the benchmark interest rate. Benchmark interest rate is a general reference interest rate in financial market. Other interest rate levels or financial asset prices can be determined according to this benchmark interest rate level. If the real estate policy tightens, the interest rates of many banks are often 20% to 30% on the basis of the benchmark interest rate.

In China, the benchmark interest rate is adjusted by the central bank in accordance with the objectives of the current monetary policy, guiding the market and lowering the benchmark interest rate, which means that entities can theoretically obtain financing support at lower interest rates and enhance market liquidity. Vice versa.

3, the deposit reserve ratio. In order to control risks, commercial banks need to put a certain percentage of capital in the central bank, that is, the deposit reserve. For example, the deposit reserve ratio of large financial institutions in China is 14%, which means that if the ICBC receives 100 yuan deposit, it needs to put 14 yuan into the central bank, and the remaining 86 yuan will be used for lending. The lowering of the deposit reserve ratio means that banks can lend more money and increase market liquidity.

In addition to the general lowering of reserve requirements, the central bank can also conduct targeted reductions in specific financial institutions to support the "three rural" and small and micro enterprises, and support the financial support for the real economy.

4, window guidance. Window guidance is a moderate, non coercive monetary policy tool for central banks to influence commercial banks' credit behavior through advice and advice. It is an exhortation regulatory means. Although window guidance originated from abroad, it has also made great progress in China, because most of the financial institutions in China are mainly state-owned assets. Under the guidance of windows, institutions will cooperate with the central bank to prevent risks and achieve the goal of regulation and control.

These are common means for our central bank to regulate monetary policy. The open market operation is a fine adjustment of the liquidity in the medium and short term market, while regulating the benchmark interest rate and the deposit reserve ratio is adjusting the market liquidity in the long run, and the corresponding market influence is bigger. It is worth mentioning that window guidance has certain Chinese characteristics, because China's financial institutions are characterized by state-owned assets, and at the critical moment, it is easy to play a cluster effect under the guidance of the central bank, control risks and achieve regulation.

What is the impact of monetary policy on the market?

The above introduces the means of monetary policy adjustment by the central bank, then what kind of impact will monetary policy adjustment have on the market?

In the latest position of the central bank's August 2nd conference call, "timely reduction of the deposit reserve ratio", "increased rediscount, medium term lending convenience and standing loan convenience, flexible operation of open market and reasonable liquidity", the money supply should increase in the second half of the year, and the market liquidity will be relatively abundant. This will affect market interest rate, exchange rate, inflation rate, stock market and bond market.

1, market interest rates. As liquidity is abundant, the market interest rate is expected to show a downward trend. Especially in the risk-free or low risk financial products, such as the yield of Yu Ebao. Over the past two years, the balance of treasure yields continued downward, not because Celestica fund management capacity is not strong, mainly because in the market liquidity continues to be abundant, credit market is not ideal, a large number of capital inflow into the low risk interest rate market, resulting in risk free or low risk baby products yields continued to decline.

2, exchange rate. Under the premise of no foreign exchange control and free capital flow, abundant liquidity and falling interest rate will lead to capital outflow and depreciation of local currency. At present, there is a stricter foreign exchange management system in China. Therefore, the liquidity and the interest rate decline have little direct impact on the exchange rate, but the pressure on maintaining exchange rate stability will increase. In August 5th, the RMB broke 7 against the US dollar. There are many factors and explanations. I believe that reducing the pressure to maintain exchange rate stability is also one of the factors.

3, inflation rate. Liquidity is abundant, that is, there is more money in the market. It is not ruled out that the inflation rate will increase, but it will be within the controllable range.

4, stock market. Liquidity is ample and interest rates are down, which is good for the stock market. On the one hand, the financing ability of listed companies is enhanced, and they can be allocated to lower cost funds to carry out production, which is conducive to the improvement of profits. On the other hand, the investor's capital cost is reduced, and the enthusiasm for investors' investment will be improved.

5, bond market. For fixed income bonds, especially low risk fixed income interest rates, debt is good. If the coupon rate of a certain bond is fixed at 6%, suppose that the market interest rate is reduced to 4% or even lower at this time, but the fixed income bond returns are still locked at 6%, and the bond value is raised. Of course, interest rate downturns have limited impact on the value of floating income bonds.

To sum up, abundant liquidity will reduce interest rates, raise inflation rate and increase the pressure of exchange rate stability, which will be good for stock market and bond market.

What do investors need to pay attention to?

Obviously, the open market operation (buy back / reverse repurchase), which is carried out by the central bank almost every week, still has a greater impact on lowering the interest rate and lowering interest rates. Monetary policy is an eternal topic in the market.

What should investors pay attention to in the face of monetary policy adjustment?

1, follow the trend. The central bank's monetary policy tends to have some continuity. Investors can take advantage of the trend. In the period of easing interest rates, some assets such as stocks, credit bonds and real estate (such as real estate policy) can be considered. In the period of tightening interest rates, some high level interest rate bonds can be considered, or cash is King (some short term and highly liquid products). Besides, it is important to point out that personal power is not able to compete with the general trend. If we fail to grasp the trend, stepping on the wrong time will be a very terrible thing.

2, diversified allocation. Because monetary policy has different effects on each type of financial products, there is a big uncertainty in focusing on assets, such as stocks, to bet on monetary policy changes. A better way is to diversify the asset allocation to hedge the negative impact of monetary policy changes and to achieve profits under controllable risk.

3, careful observation. The emergence of monetary policy information is very frequent. For example, the central bank will carry out repo / reverse repurchase operations every two weeks, adjust the money supply of the market, and the Shanghai interbank offered rate (SHIBOR) will be updated on every working day to reflect the current market interest rate. Finally, the central bank's adjustment of the benchmark interest rate and the deposit reserve ratio will also become the major news of the day. As investors, it is necessary to pay attention to these trends and remain sensitive to the market.