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What does the central bank cut interest rates mean?

Affected by the COVID-19 epidemic in 2020, central banks around the world have opened the channel of "requirement reserve ratio and interest rate cuts". RRR cuts and interest rate cuts are both monetary policies of the central bank. I believe many investors are not very familiar with the definitions and differences between the two.

Today we will talk about the specific operations of the central bank's RRR cut and interest rate cut, the difference between the two, and the impact on daily life. How the central bank cuts the required reserve ratio

The main business of banks is to earn "interest spreads" by absorbing deposits and issuing loans. In order to strengthen the supervision of banks and maintain the stability of the lending cycle, the central bank requires banks to A certain amount of money is reserved, but all the money cannot be loaned out. This amount of money is specially used to meet the withdrawal needs of depositors. It is the "deposit reserve".

The central bank lowers reserve requirements, which means reducing bank deposit reserves, reducing the proportion of funds reserved by banks according to the economic environment, and increasing the amount of funds that banks can lend, thereby increasing the scale of credit, increasing money supply, and releasing liquidity. , stimulate economic growth.

The RRR cut will increase the supply of funds in the market by releasing the margins of commercial banks with the central bank, which will help stimulate the production process. How the central bank cuts interest rates

The central bank's interest rate cut refers to the financial method in which the central bank lowers the interest rates on deposits and loans and uses interest rate adjustments to change cash flow. When banks cut interest rates, depositors' deposit income will decrease. Interest rate cuts will cause depositors to tend to withdraw their deposits and convert them into other investments or consumption, thereby releasing liquidity to the market and stimulating the growth of the real economy.

In the first half of 2020, the central bank successively lowered the one-year MLF interest rate and the loan market quotation rate LPR. The former was adjusted from 3.25% to 3.15%; the latter dropped by 10 basis points. Both are at obvious Descending channel.

Although cutting interest rates does not increase the amount of market funds, it can change the direction of investors' use of funds and increase trading activity in the securities market by reducing the return on central bank deposits. The impact of the central bank's RRR cut and interest rate cut on life

The most intuitive impact of the interest rate cut is that the income from bank deposits has been reduced. For example, after the one-year deposit benchmark interest rate is reduced by 0.25 percentage points, if depositors If you save RMB 100,000 in time deposits, the annual interest will be reduced by RMB 250. Similarly, the yield rate of bank financial products will be reduced accordingly. For investors who invest their idle funds in fixed-income products, the annual interest income will be reduced a lot.

However, interest rate cuts will promote the flow of bank deposits to consumption and investment, which is conducive to the overall upward development of the economy. It is good news for the stock market and bond market. We can also see that my country’s securities have The market is relatively active.

In addition, a major benefit of the interest rate cut and the reserve requirement ratio reduction is that the interest rates of commercial loans and provident fund loans will decrease accordingly. Since the repayment interest rates of provident fund loans and commercial real estate loans are linked to the central bank’s benchmark interest rate, the central bank will cut interest rates. After the RRR cut, the mortgage pressure on individuals and families who had to borrow money to buy a house was reduced accordingly.

The main purpose of the central bank's RRR cut and interest rate cut is to give play to the guiding role of benchmark interest rates, promote the reduction of social financing costs, and support the sustained and healthy development of the real economy. Capable entrepreneurs will be given a more relaxed environment to start their own businesses, and some small and medium-sized enterprises can be supported to tide over difficulties in extraordinary times.