Central Banks And Interest Rates 2022

by Ntombi Malatsi | Oct 11, 2022 | ECONOMIC NEWS, FOREX TRAINING

What Is A Central Bank?

Central bank is a national bank that provides financial and banking services for its country’s government and commercial banking system. Central banks play a major role in the markets. Interest rates are the most important event of the Forex markets and any discussions that take place in the central banks can cause huge volatility in the markets within seconds.

What is the role and function of a Central Bank?

• To set official bank rates used to manage inflation and exchange rates
• To issue a country’s currency
• To set targets and monitor economic data while they implement special tools.

One of the special tools that is used by the central bank is Interest/bank rates adjustments. When the Central Bank sees a need to hike or cut their rates, they simply do so.

Why Do Central Banks Cut Interest Rates?

• To encourage borrowing : When the Interest Rates of a country are cut, it also means that the people who are borrowing from the banks will be paying less Interest on their loans. That will then encourage consumers and even big companies to borrow for spending and bigger investments.
• To make saving less attractive: When the return on savings are lower, most people would opt for spending money than holding on to it.
• To weaken the currency: When the currency is weak, the country’s exports become more competitive and their imports more expensive which also encourages consumers to buy local because of the exchange rates.
• To lower Mortgage loans: When mortgage loan holders pay less interest on their existing loans, they may be left with more money and that should increase consumer spending in the country.

Why Do Central Banks Hike Their Interest Rates?

• When the economy is growing at a rate that may lead to hyperinflation (monetary inflation occurring at a very high rate) that is when the Central Bank hikes the county’s interest rate.
• To make saving and investing more attractive: When the returns on savings and investments are higher, it encourages more people to save or invest.
• To increase the value of the country’s currency: When the country’s currency value is higher, it attracts foreign investors to invest in the country.

When the pandemic (Covid 19) hit global economies, all Central Banks embarked on a rate cutting spree. Now that all economies are recovering, Central Banks are on a rate hiking spree. Every country is trying to secure investors. The sad thing about all these rate hikes is that whose who qualified and took loans during rate cuts are now paying more interest due to current higher Interest Rates.

Why Do We (Traders) Care?

The biggest factor that shifts the price in the Forex markets is the Interest Rate changes set by the Central Banks. The changes made by the Central Banks in their rates are the indirect response to other indicators/economic data released right throughout the month. As a trader, it is very important to understand what moves the markets and how to take advantage of that.

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Check out the latest episode on my Podcast titled “Why you should not ignore fundamentals in trading“. To read this content on the GO, download the App on Google PlayStore. Below is the table of 8 major central bank’s current Interest Rates. There’s still more rate hikes expected and these figures will change soon. These are the ones that I personally trade. I have excluded emerging markets.

Should you wish to learn how to trade interest rates, read a monetary policy statement and understand what it means to the economy and how it affects currencies and stocks, send me a WhatsApp on +27 78 144 6851 to request a quote on this course. Thank you for stopping by, I hope you found value in this post. If you did, please kindly share with as many people as possible.