The RF Central Bank uses the key rate and https://telegram-store.com/catalog/product-category/channels/economics to influence the whole economy, regulates the inflation level and controls the ruble exchange rate. The key rate is the minimum interest rate at which banks lend. They, in turn, lend to people and businesses, but the interest rate is slightly higher.
Many people know about the relationship between bonds and the rate. If the key rate is higher, the bonds purchased lose in value as they become unattractive to investors. As the rate goes down, the yield increases.
But what happens to stocks at this point? The answer to this question will be published below.
Lower key rate
A low key rate indicates that money is not very expensive. At times like this, the economy is booming, business is booming, and people are getting loans at low interest rates. Participation in investment projects becomes attractive for many people. On the downside, inflation begins to skyrocket. People have a demand for stocks because they want to get more benefit than from investing in bonds or deposits. Stock prices also rise because investors return. If a company has a high debt load, lowering the key rate will raise the overall return by up to 10 percent.
If we’re talking about those organizations that work with finances, their earnings are starting to fall. Consequently, share prices will also fall.
Key rate hike
The rate hike occurs when the central bank wants to curb skyrocketing inflation. Money becomes expensive, the purchasing power of the population drops drastically, which also makes the economy suffer. The cost of credit becomes much higher, requiring organizations to spend more money to service it. The value of stocks begins to fall as investors move to the bond market because of the unstable situation.
When the key rate is high, the value of shares of financial institutions increases. For them such a time is characterized by large profits. The rate has risen, so the commissions and interest on loans have also become higher. And financial organizations exist precisely because of this.
It is worth reiterating what impact the rate has on the economy as a whole.
Decrease in the key rate
- The population has more money, therefore, the purchasing power increases. The prices of many goods go down.
- Businesses are actively growing, as young companies are not afraid to take out loans because of the low interest rate.
- Most companies have higher stocks, which leads to good profits.
- Interest rates on deposits and loans for the general population go down.
- Inflation is rising.
- The economy begins to recover and gain momentum.
Key rate increases
- Inflation begins to return to normal or simply decreases.
- Interest rates on deposits and loans begin to increase.
- The financial capacity of the population decreases, and because of this, purchasing power suffers. Goods become expensive, but no one takes them. Because of this, small and medium-sized businesses suffer.
- The development of the economy and production stops or deteriorates.
If a person wants to make money on stocks or bonds, he must carefully monitor the economic situation in the country and choose the right time. Only a proper analysis and the right approach will help to multiply capital.