Ever since the COVID-19 pandemic struck the world, Central banks across the world kept interest rates (Repo rate as widely known in India) at their all-time lows to revive economic growth! When the benchmark rates are low, banks across the country also lower their lending rates. This improves the credit demand in the economy and keeps the growth wheel spinning. It’s an era of easy money!
And since credit revival helps bring back demand for goods and services in the economy, stock markets cheer up the move. Also, lower interest rates mean lower interest costs will be reflected on a company’s P&L, thus increasing profitability. This is also known as quantitative easing. But things might soon turn around! Hence the importance of this event!
A Look at the Past
Going by the past reveals something interesting. The one-year return by the S&P 500 index during the previous eight rate hikes has been positive!
How Will the Stock Markets React?
The sad part is that this golden period of free money will soon come to an end as Central Banks across the world have started increasing interest rates to control the inflationary pressures building up!
Higher interest rates by the US Fed will mean that foreign investors who invested in emerging markets in India and Brazil might pull their money out and take a flight to the US. This might lead to a near-term blip in stocks.
Should This Concern You?
In light of these events, investors may see some volatility in the stock markets. Experts predict that the US Fed might increase interest rates by more than five times in the next year by 0.25%, and take it upwards of 2% from the current 0.25%. Further, the elevated oil prices would bring the inflation numbers much higher, which would provoke Central Banks to increase the speed of monetary tightening.
The Bank of England has already increased its Central bank rate, and it’s high time that others might follow suit to fight inflation!