Why do they say ‘cut rates’ will help the economy?

Please tell me. Do you feel relieved with the current moratorium of 6 months for home loans? From April till the end of September? Where we get to restart our mortgage payment only in October 2020? Frequently asked questions on moratorium Actually, most Malaysians welcome the 6 months deferment. do. However, the current economic situation also meant that our Bank Negara Malaysia (BNM) also wanted to help to encourage the economy to move along. Thus, they have reduced the interest rates. Actually why do they say that when BNM cuts the rate, there would be more economic activities?

Lower interest rates, how does it help anyway? Let’s look at two ways. First would be people with money. These are the people who have extra cash. The cash is also usually deposited into the bank on a long term savings. Since the rates are lowered, it will get less attractive to keep all their money in the bank. They will now use some parts of it for investment.

This money which used to be kept in Fixed Deposit may now be used to buy some stocks from the BURSA. Thus, the BURSA gets a little push. When more people start to reinvest their money, the sentiment may just improve. This will then encourage people to spend more and the multiplier effects from all these would mean a higher economic growth.

Second would be people without money or people who may need the money. Let’s look at businesses. Many times, businesses would need to keep investing so that the business could grow in the future. However, with cashflow being an issue all the time, they would need to borrow money if they wanted to grow. So, if rates are high, they are discouraged from borrowing.

Now, with a lower rate, they may think it is a good time to borrow and to expand their business. When they borrow and expand, they will need to hire more people. The more people they hire, then more people would have an income to spend. When more people buy things, the sellers would then have to reorder from the manufacturers. The manufacturers would need to order from raw material suppliers. Suddenly everyone has money to spend! The economy grows.

Anyway, this is a very simplified way of explanation yeah. So, is another cut in rates on the way? It seems so yeah. There’s this viral news about the possibility of rates being cut up to 75 basis points within 2020. Now that you understand why rate cut will help the economy, are you wishing for a cut or still think it’s better to keep the money in the bank then? Happy investing yeah.

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