I’m no good at economics lol
In: 4812
Good Lord, the answers in here range from close to awful. I’ll try and condense one.
The impact itself is that if an investment has a rate of return less than 0.5%, then everyone holding it would be better off selling it and putting their money in bank bonds.
This removes cash from the economy, which curbs inflation, but it also removes cash from the economy, which curbs growth.
There’s then a trickle effect. The investments below 0.5% annual yield are companies. To prevent being worthless, since leaving cash in the bank is more profitable than being invested in the company, they have to increase yields to above 0.5%. This typically results in layoffs to reduce costs. Let’s say that company gets to 1% returns.
Well, now any company that was running at 0.75% is going to do the same. Up the chain.
Meanwhile, private banks exist by both investing and loaning out money. If the investments are more expensive to purchase, they’ll raise interest rates on consumer and business loans. On top of that, the reduced cash in the economy as mentioned earlier comes back to haunt us. New businesses are less likely to spring up with higher interest rates on loans and less cash in consumer’s pockets to buy what the business offers.
Higher interest rates pinch the economy. Now there’s another side to this.
Inflation and recession are coming regardless of this move. What it allows the national bank to do when it gets to a breaking point is DROP the interest rates through the floor, spurning massive investment and cashflow in the economy immediately after. It’s a tool to allow for resolving catastrophe.
But knowing that, market investors recognize that the bank gearing up to fix impending economic collapse means the market isn’t safe, so they’ll start pulling cash as fast as possible to insulate. And the markets tank.
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