“On the month of July 2019, the US Fed slashed the interest rates by 25 basis points”
Great. What does that have to do with you staying in Malaysia or Singapore?
What does the US economy has to do with Malaysia or Singapore’s economy?
The harsh truth. It does. AND A LOT. So it’s best to learn a wee bit about it
Let’s start with the basics. Every time a bank takes your deposit to lend it to someone, there is always a probability that the borrower defaults (not pay his installments). So in return of taking this risk, the bank charges the borrower an interest rate on the money they borrow, and then pays you a fraction of the interest as a reward for keeping your money in a bank (and letting them lend it out).
So in essence, high risk high reward works in a way, that if a borrower’s credit rating is good, they get to enjoy lower interest rates on their bank borrowing. And vice versa your interest rates will be high if you do not have good credit ratings.
But there are times when US Feds would review the interest rates after gauging key economic data. So when US decides to stimulate growth, they would adjust the interest rates down, and if they want to curb inflation, they would adjust the interest rates up.
A lower interest rates means we end up paying lesser interest payment. So we suddenly find ourselves with more cash on hand. And with more cash we end up buying more stuffs hence stimulating economic growth.
Conversely, if the mass public has too much spendable money, it would stoke inflation, driving up the prices of goods drastically. So the Feds will raise interest rates to water down the inflation flames. You will end up paying more interest payments to the banks.
So now you know how (the very basics at least!) on how the US controls its currency strength and inflation. Both come hand in hand. The price to pay for growth is with inflation. Moderate inflation.
But why should Malaysians or Singaporeans care that much?
Here’s the thing. We live in a world of boarder-less trade. Countries export what they have in excess and import what they are lacking. So for Singapore where food production is not self sustainable, Singapore imports in food. Malaysia is a manufacturing hub for electronic parts, palm oil and petroleum. So these will be their main exports.
Now, suppose the US Dollar (USD) became weaker since the Fed cut the interest rates. Borrowing costs became cheaper. So its more affordable to borrow money hence the value of the USD drops. What will happen to export orientated countries’ currency? Relatively, foreign currencies become more expensive. And this would make their exports unattractive based on the price in the globally commoditized market.
And how do other countries react with the US fed rates slashing their interest rates? Most would follow suit to maintain their currency at attractive levels to sustain trade and economic growth.
So should you be happy? Yes and No.
Finally your house mortgage and car installment interest rates may look cheaper on paper, but so is the value of the monthly paycheck you are working for.
You get to save more on interest expenses but do not forget to save even more on going for that dream holiday that you have planned for months ya! 😀