As the banking crises continue to plague Europe and the United States, the Federal Reserve announced on December 13, 2023, that it would only pause its rate hikes and discuss the possibility of rate cuts for the first time.
Federal Reserve Chairman Jerome Powell even admitted to considering a complete halt to rate hikes. As a result, the market widely believes that the era of rate hikes in the United States is coming to an end and a period of rate cuts is imminent.
But what exactly are interest rate cuts? What impact will they have on individuals, the overall economic environment, and investments? How will interest rate cuts affect the stock market, bonds, commodities, exchange rates, and fixed-term deposits? The following blog post will give you some hints!
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Table of contents: Interest rate cuts in 2024
- What is an Interest Rate Cut?
- US Interest Rate Meeting FOMC Calendar
- Impact of Interest Rate Cuts in 2024
- Impact of U.S. Interest Rate Changes on the Hong Kong Stock Market
- 2024 Rate Cuts Investment Strategy
- Frequently Asked Questions: Rate Cut 2024
What is an Interest Rate Cut?
An interest rate cut, also known as a rate cut, is one of the monetary easing measures used by a central bank to stimulate economic activity. It involves lowering the benchmark interest rate to increase cash flow, which can stimulate investment or consumption.
You may find that interest rate cuts usually occur during times of economic slowdown, recession, high unemployment rates, or tight monetary conditions.
In the past, the US has already experienced cycles of rate cuts, providing us with valuable insights that we can draw upon:
- 2020 Fed Rate Cuts: Coping with COVID-19
- 2019 Fed Rate Cuts: Mid-Cycle Adjustment
- 2008 Fed Rate Cuts: The Great Recession
- 2007-2008 Fed Rate Cuts: The Housing Market Crash
- 2002-2003 Fed Rate Cuts: Flagging Recovery, Low Inflation
- 2001 Fed Rate Cuts: The Dot-Com Bust and 9/11
- 1998 Fed Rate Cuts: Global Currency Crisis
- 1995-1996 Fed Rate Cuts: Mid-Cycle Adjustment, 90s-Style
- 1990-1992 Fed Rate Cuts: The Gulf War Recession
What is a benchmark interest rate?
A benchmark interest rate, also known as a bank rate or base interest rate, is the interest rate charged by a central bank to commercial banks for loans. The benchmark interest rates vary in different countries and regions.
If you are investing in Hong Kong, here are the 3 influential benchmark interest rates you shouldn’t overlook:
United States: Federal Funds Target Rate (U.S. Fed Funds Target Rate)
The Fed rate, also called the “Federal Funds Rate,” is published by the Federal Reserve. It is a range of interest rates set by the Federal Reserve. By carrying out different operations, the Federal Reserve influences overnight rates to stay within the target range.
The U.S. Fed Funds Target Rate has a worldwide impact, and central banks adjust their own monetary policies based on the Federal Reserve’s interest rate policy. This helps them decide whether to increase or decrease interest rates.
Hong Kong: Hong Kong Base Rate
It is also called the “Discount Window Base Rate,” published by the Hong Kong Monetary Authority. The Hong Kong Base Rate is calculated based on either 50 basis points above the lower end of the current U.S. Federal Funds Rate target range or the average of the 5-day moving average of overnight and 1-month Hong Kong Interbank Offered Rates (HIBOR), whichever is higher.
China: China Benchmark Interest Rate
It is published by the People’s Bank of China (PBOC) and serves as a guiding rate for the deposit, loan, and discount business of commercial banks in mainland China. The deposit rates of financial institutions can fluctuate within 10% above or below the benchmark interest rate, and loan rates can fluctuate within 20% above or below the benchmark interest rate.
US Interest Rate Meeting FOMC Calendar
Regardless of your investing experience, you should always be aware of the FOMC meetings, as the Federal Open Market Committee (FOMC) holds 8 meetings each year to adjust the development of the economy through interest rate hikes or cuts.
Here are the scheduled meeting dates for 2024:
| Month | Dates | Economic Projection |
| January | 30-31 | |
| March | 19-20 | Included |
| Apr/May | 30-1 | |
| June | 11-12 | Included |
| July | 30-31 | |
| September | 17-18 | Included |
| November | 6-7 | |
| December | 17-18 | Included |
Note that the period before and after meetings could increase market volatility. Therefore, stay alert during those days between the meetings.
Purposes of interest rate cuts in 2024
What is the use of adjusting interest rates? It actually has an impact on overall economic activities through capital flow. There are 2 major purposes for rate cuts:
Lower deposit rates
When the central bank lowers interest rates, commercial banks follow. This reduces interest earned from deposits, leading investors to withdraw money from banks for higher returns through investments or consumption.
In short, central bank interest rate cuts can boost market cash flow, stimulate investment and consumption, and promote economic growth.
Lower loan rates
Lowering loan interest rates stimulates borrowing from banks by businesses and individuals, increasing liquidity in the economy and promoting economic activity. It also reduces the burden of loan repayment for borrowers and lowers the risk of nonperforming loans.
Impact of Interest Rate Cuts in 2024
The following table illustrates the overall impact of interest rate cuts on different financial instruments:
| Financial Instrument | Impact of Interest Rate Cuts | Reasons |
| Stock Market | Positive | As interest rates decrease, deposit rates decline, leading to increased funds flowing into the stock market and boosting stock prices. |
| Bonds | Positive | As interest rates decrease, bond yields decline, reducing the interest burden on government and corporate debt. This increases bond prices and may lower long-term returns for investors. |
| Commodities | Positive | As interest rates decrease, the value of the currency may depreciate, benefiting commodities priced in that currency. This can lead to an increase in commodity prices, such as gold and oil. |
| Exchange Rates | Negative | Interest rate cuts can cause a country’s currency to depreciate, discouraging foreign investors and leading to a decline in the exchange rate. |
| Fixed Deposits | Negative | When the central bank cuts interest rates, deposit rates offered by commercial banks decrease, reducing the interest income for depositors. |
Impact on the stock market
Interest rates and the stock market are generally inversely related. When interest rates are cut, deposit rates decline, making investments in the stock market more attractive compared to bank deposits. This leads to increased investment in stocks and can contribute to stock market growth. Lower borrowing costs for companies also enhance profitability and potentially increase stock prices.
| For investors | For businesses |
| When interest rates decrease, deposit rates decline, making bank deposits less attractive. Investors are more willing to withdraw money from banks and invest in other assets to seek higher returns, leading to increased activity in the stock market. | Lowering interest rates can reduce financing costs, increase production scale, and improve profitability, which may enhance market value. |
| Companies can also engage in share buybacks at lower costs, potentially driving up stock prices. |
Impact on bonds
Interest rate cuts can have a positive impact on bonds. When interest rates decrease, bond yields also decline. This reduces the interest burden on government and corporate debt, making the issuance of bonds more favourable for governments and companies. Additionally, the increased demand for bonds can drive up bond prices.
| For investors | For governments and companies |
| When the central bank increases interest rates, deposit rates rise, making bank deposits more attractive compared to bonds. This can lead to a decrease in bond prices. | Lowering interest rates can reduce the interest burden on government and corporate debt, making bond issuance more favourable. |
| When the central bank lowers interest rates, deposit rates also decrease. This makes bank deposits less appealing compared to bonds. Investors tend to withdraw money from banks and invest in bonds, which can lead to an increase in bond prices. | Governments and companies can issue bonds at lower costs, potentially driving up bond prices. |
Impact on commodities
Interest rate cuts can have a positive impact on commodities. A decrease in interest rates may lead to a depreciation of the currency, which can benefit commodities priced in that currency. For example, a weaker currency can increase the price of gold. Also, lower interest rates can stimulate economic activities, increasing the demand for commodities such as oil.
| Impact of Interest Rate Cuts on Commodities | Reasons |
| Increase in the price of gold | A decrease in interest rates may lead to a depreciation of the currency, which can benefit commodities priced in that currency. For example, a weaker currency can increase the price of gold. |
| Increase in the demand for commodities such as oil | Lower interest rates can stimulate economic activity, increasing the demand for commodities such as oil. |
Impact of interest rate cuts on exchange rates
When the central bank lowers interest rates, it increases the supply of the country’s currency in the market, directly leading to depreciation of the country’s currency and unfavourable exchange rates with other countries.
If the central bank’s interest rate reduction is lower than the benchmark interest rate of other countries, investors may even sell the country’s currency and buy other currencies for arbitrage, which will exacerbate the depreciation of the country’s currency.
If the Federal Reserve reduces interest rates, the US dollar may weaken, leading to depreciation and capital outflows to other countries.
From 2021 to 2023, the rate hikes in the US caused the inflation of the USD and the depreciation of the JPY. In October 2023, the yen slumped back to below 150 per dollar again. So in the coming US rate cut, investors expect that the JPY will appreciate against the USD.
Impact of interest rate cuts on time deposits
Frankly speaking, during an interest rate reduction, it isn’t good for time deposits as an investment tool. Normally, commercial banks must adjust their interest rates based on the central bank’s rate cuts.
When the central bank lowers interest rates, commercial banks reduce the rates for deposits, resulting in investors receiving less interest. This could prompt them to withdraw their funds for alternative investments.
Impact of U.S. Interest Rate Changes on the Hong Kong Stock Market
The Hong Kong dollar is pegged to the U.S. dollar under the “Linked Exchange Rate System,” and it is required to closely follow the monetary policy of the Federal Reserve. Therefore, the Hong Kong Monetary Authority adjusts the interest rates of the Hong Kong dollar based on the interest rate decisions of the Federal Reserve.
In the Hong Kong stock market, more listed companies from mainland China are emerging, with their profits primarily generated from the mainland. Changes in Hong Kong dollar interest rates do not significantly affect most Hong Kong stocks. Conversely, changes in interest rates set by the People’s Bank of China have a greater impact on these companies.
To summarise, U.S. interest rate changes significantly influence the Hong Kong dollar, while Chinese interest rate changes have a greater impact on Hong Kong stocks.
Rate cut 2024: Investment Strategy
Investment strategies during interest rate cuts. During a period of interest rate cuts, investors can consider the following strategies:
| Investment Strategy | Description |
| Stock investment | Look for potential growth stocks and companies with stable dividends, as these stocks tend to perform well in a low-interest-rate environment. |
| Bond investment | Purchase bonds to obtain stable fixed income. Consider investing in bonds with lower risk and higher returns. |
| Real estate investment | In a low-interest-rate environment, consider investing in real estate, such as rental properties or commercial properties. |
| Forex investment | Pay attention to the volatility of currency pairs and look for opportunities that may benefit from interest rate differentials. |
Disclaimer: The information provided in this document is for informational purposes only and does not constitute financial or investment advice. Investing in financial instruments involves risks, including the risk of loss of capital. Before making any investment decisions, conduct thorough research and analysis and consult with a qualified financial advisor.
Frequently Asked Questions: Rate Cut 2024
What is the impact of the interest rate reduction on the stock market?
For investors, when interest rates are lowered and deposit rates decrease, they are willing to withdraw money from banks for other investments in order to seek higher returns, leading to a vibrant stock market.
What is an interest rate reduction?
Also known as rate cut, in English, it is called “cut interest rates.” It is one of the means of monetary easing policy used by a central bank to increase cash flow by reducing benchmark interest rates. Cash flow can then be used for investment or consumption, thereby stimulating economic activities.
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