I received a question from Eric Phua who asked:
I am confused with the minimum bid rate which is announced by the Central Bank. Does it indicate the change in bank interest rates? And how does changing the interest rate can affect the currency?
I hope to get a valueable answer from you.
Minimum bid rate is just another term of bank’s interest rate or refinancing rate. This is essentially the interest rate in which domestic banks need to pay when they borrow money from the central bank. This rate will then be translated into domestic banks’ borrowing rate for the consumers.
Central banks usually raise or lower interest rates to achieve a particular inflation target. If the current inflation is below their target, the bank may cut the rate to attract consumers to spend more given the cheaper borrowing rate, thus, increasing the demand for goods and services. An increase in demand for goods and services would result in an increase in inflation.
Conversely, the bank may hike its rate if the current inflation reading is above their target. Making borrowing costs more expensive would put a curb on demand and spending. This move ultimately lowers inflation.
When a central bank increases interest rates, the respective currency tends to strengthen because funds would flow into that particular country in search of a higher rate of return. Conversely, when a central bank cuts the interest rate, the currency tends to weaken as funds exit the country in search for a higher yield.
To your success as a profitable trader,