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Central Banks and Interest Rates

By: Chintan Karnani, Insignia Consultants

 -- Published: Friday, 15 June 2018 | Print  | Disqus 

Interest rates are now a key simulator for growth in most nations. Interest rates have been used as a short-term tool as well as a medium-term tool by central banks to control growth in their nations and also control inflation. After the second world war, interest rates and interest rate futures have been the key to the direction of global financial markets be it stocks, bonds, currencies or even precious metals.

Currency carry trade (virtually non-existent right now) is basically taking advantage of the interest rate difference between two nations and currency price difference for financial gains and investment.

Globalization has resulted in open economies (with investor protection norms) where anyone can invest anywhere. Most of the global stock exchanges as well as global treasury markets are dependent on global investors for higher volumes as well as price rise. Interest rates and interest rate trends is one the key factors which helps globetrotting ultra-rich people and hedge funds decide which nation to invest and for what period.

Corporates in high interest rate nations like India take debt from low interest nations like Japan and the USA to finance business expansion. Any rise in interest rates in low interest rate nations can adversely affect corporate profitability in India and other nations where there is very high corporate debt.

The American bond markets is dependent on global investors. The USA has a huge trade deficit. If other central banks do not invest in American treasuries, then there can be negative interest rates in the USA. The Chinese are the largest investors in American treasuries along with Japan. China has a massive trade surplus with the USA. But it uses the surplus to invest in American treasuries. Interest rates determine the nations treasury yields which in turn affects foreign inflows and currency price.

The global investment world is related to interest rates. Central banks sets the interest rate. There is forward guidance on interest rates by most central banks. Central banks are now obsessed with interest rates to direct growth rates in their way.  They are never able address key fundamental issues of their nations due to political pressures or due to laziness. Asset bubbles are created by central banks deliberately as they just prefer the easy way out of manipulating interest rates and interest rate futures. One blurt by a key central bank chief on interest rates and global financial markets can turn topsy turvy. Such is the grip of interest rates on our everyday lives.

Central banks are headed by a bunch of lazy people. Central banks now a days play a T20 cricket and not a five day test match. The only difference between a central bank and retail investor on investment is the size. Does any central banks act in an independent way in the year before democratic elections are held? I have never seen one.

To Conclude

Winners are people who are able to judge interest rates correctly. As a kid growing up, I have seen my mother not leaving any funds idle even for a single day in the bank. I cannot emulate my mother on interest rate based investment strategy. Ask yourself whether you can beat the masses on interest rates. More on the concluding part next week.

Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, crypto currency, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information. Nothing in this article is, or should be construed as, investment advice. Prepared by Chintan Karnani


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