From Wednesday to Friday, the world’s central banks will issue their interest rate decisions, led by the US Federal Reserve, which will issue its decision this evening, amid anticipation from the East to the West of the world.
Wall Street forecasts indicate that the US Federal Reserve will cut interest rates on the dollar by 25 basis points, to settle at a range of 5-5.25%, which if it happens, will be the first since March 2020.
Wall Street’s major indexes opened slightly higher today, with the Dow Jones Industrial Average rising 22.7 points, or 0.05%, to 41,628.91, the S&P 500 rising 7.1 points, or 0.13%, to 5,641.68, and the Nasdaq Composite rising 35.3 points, or 0.20%, to 17,663.383.
The hypothesis of the reduction will push the Arab central banks – including Saudi Arabia, the Emirates, Jordan, the Sultanate of Oman and Qatar – to take a similar decision, due to the pegging of these countries’ currencies to the dollar.
Also, the central banks of Brazil, Turkey, Japan and England meet this week to decide on interest rates for their currencies, in separate meetings that run from Wednesday to Friday.
In light of expectations of the start of monetary easing (interest rate reduction), there are winners and losers from these decisions.
The US interest rate is currently between 5.25% and 5.5%, at a 23-year high, and has affected global lending and government debt denominated in or linked to the US currency.
The US Federal Reserve has 3 meetings left this year, the closest of which are Tuesday and Wednesday (yesterday and today), a meeting in November, and the last in December 2024.
Top Winners
- Borrowers, whether individuals, companies or even governments, will be the first to benefit from the interest rate cut, because the interest on these loans will decrease, and thus the value of the final monthly installment due on borrowers will decrease.
- Also among the winners are global stock markets, which may be a target for investors in dollar-denominated funds, who will move their money into other investments that will generate higher returns.
- After more than two years of bank depositors exploiting the high interest rates on them, the interest rate cut reduces the financial returns on deposits, which leads them to search for investments with better returns.
- Gold is among the winners of the decline in interest rates on currencies in the world, as the natural relationship between the yellow metal and interest rates is inverse, which appeared this week when gold broke historical peaks, with expectations of a reduction in interest rates.
- The export sector will benefit from the hypothesis of reducing interest rates, because exports become highly competitive with other export markets in the world due to the decline in the value of the currency. Reducing interest rates slightly reduces the value of the currency, and thus this currency becomes less expensive for importers (i.e. the price of the commodity becomes lower), so the chances of demand for cheap goods increase.
- Among the winners are also the local economies around the world, which will receive cash liquidity in the form of investments. This money was in the banks, and its flow into the markets means its investment and positive impact on the wheel of production, employment and economic growth.
The biggest losers
- Banks around the world are at the top of the list of the biggest losers from the hypothesis of reducing interest rates, because depositors will resort to withdrawing their money or part of it and investing it away from the banking sector.
This money has been in the banks for more than two years, and its owners are receiving financial returns, but lowering interest rates will reduce the amount of returns and push investors to look for better investment tools.
- Depositors are also losers, especially those who do not have a risk-taking spirit and have not found low-risk investment tools to put their money in, which prompts them to keep deposits inside banks and receive lower returns than before.
Banks are also harmed by another aspect, which is the decline in their financial returns from bank lending, because interest rates will decline, and thus the value of the interest due on monthly installments will decline.
- Another major loser is China. Going back to the history of the relationship between the dollar and the yuan, the latter rises as the former declines, and here the cost of buying the yuan increases, which means an increase in the cost of Chinese exports and makes them less competitive.
- Another important issue is that lowering interest rates means increasing investment, which is positive, but increasing investment means increasing production that requires labor, and thus increasing employment.
But increased employment means increased liquidity among individuals, and this is where increased consumption occurs, which at some point leads to increased demand for goods, and thus inflation rises again.
