What does the central bank mean by announcing a 10-point rate cut？ What is the impact on the wealth management market？

China’s interest rate level has been in a downward trend for some time in the past, which is completely different from other major countries in the world. While other countries are still raising interest rates, China’s central bank has announced a 10-point rate cut. So, what does the central bank mean by cutting interest rates by 10 points? What is the impact on the wealth management market?

The central bank cut interest rates by 10 points, that is, the central bank lowered the benchmark interest rate by 0.1%. The benchmark interest rate here is not necessarily the benchmark interest rate for deposits and loans, but may also be the interest rates of other monetary instruments held by the central bank, such as rediscount rate, medium-term lending facility (MLF) interest rate, reverse repo rate and so on.

In fact, after the interest rate marketization reform, the influence of the central bank on deposit and loan interest rates has weakened a lot. The loan interest rate has been authorized to the National Interbank Funding Center to calculate and publish, while the benchmark deposit interest rate has not been adjusted for many years, and the adjustment of deposit interest rate is mainly determined by the market.

The interest rate instruments that the central bank still uses frequently mainly include the operating interest rate of open market business, the convenient interest rate of standing loan, the convenient interest rate of medium-term loan and so on. Among them, the reverse repo rate and the medium-term lending convenience rate in the open market business are the most important and frequently used interest rate tools.

For example, the central bank announced a 10-basis-point interest rate cut, which is the 7-day reverse repurchase operating rate. After the interest rate cut, the 7-day reverse repo rate dropped from 2% to 1.9%.

Reverse repurchase is the behavior of financial institutions to borrow money from the central bank with securities as collateral, return the principal and interest to the central bank after maturity, and recover the securities. The central bank’s reduction of the interest rate of reverse repurchase operation means that the interest of financial institutions borrowing money from the central bank is reduced, which can reduce the financing cost of financial institutions, just like reducing interest rates.

Then, what impact will the central bank cut interest rates have on the wealth management market?

First of all, the yield of some sound wealth management products may decline.When the central bank cuts interest rates, for some fixed-interest wealth management products, the yield may drop, such as reverse repurchase of government bonds, bank deposits, government bonds and so on.

On the one hand, the central bank’s interest rate cut is to reduce the real interest rate of social financing. After the interest rate cut, the financing cost of institutions borrowing money from the central bank will drop. The reverse repurchase of government bonds and bank deposits are also ways of institutional financing. After the interest rate of financing from the central bank drops, the interest rate of financing from other channels will also drop with great probability.

On the other hand, the reduction of the central bank can also play an exemplary role in guiding the decline of other financing interest rates.

For investors, the decline of market financing interest rate means the decline of investment yield.

In addition to fixed-interest wealth management products, there are also some wealth management products related to fixed-interest products, and the yield may also drop.

For example, money funds, interbank deposit index funds, etc. Because these wealth management products mainly invest in products with fixed interest, the income mainly depends on interest. After the interest of fixed-interest products is reduced, the income of these wealth management products will also drop.

Therefore, if the central bank cuts interest rates, the income of the sound financial management market may be further reduced.

Secondly, the income of some high-risk and high-yield wealth management products has the opportunity to rise.The central bank’s interest rate cut is good for wealth management products such as stocks and gold, which mainly rely on rising prices to obtain good returns.

Reducing interest rates not only reduces the financing cost of society, but also increases the money supply. Because you can borrow more money at the same interest rate, the borrower will tend to borrow more money. The central bank did not lend a sum of money, that is, put in a base currency, which will be amplified several times through the role of currency multiplier.

For assets such as stock market and gold, as long as there is enough money to buy them, their prices will rise. Therefore, the increase in market funds is obviously beneficial to their price comparison.