0.5% rate cut by BOE, ECB - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

0.5% rate cut by BOE, ECB

Nov 9, 2001

Both the Bank of England and the European Central Bank have slashed rates interest rates by 0.5%. The move follows the deterioration in economic fundamentals and the rate cut in the US. Lower interest rates, though by no means the only, are a critical part of any plan designed to fight of a global recession. Lower interest rates benefit the economy in several ways. Lower cost of money is an added incentive for corporates to invest and for consumers to make purchases i.e. the demand for consumption and investment goods tends to increase.

Let's take the example of purchasing a house. In India itself, the persistent decline in interest rates has made home ownership much more affordable. Indeed, demand for loans to fund home purchases continues to grow robustly. Same is the case in the US, where housing continues to record a relatively better performance as compared to the other sections of the economy. The demand for homes leads to more construction activity thus resulting in derived demand for cement, steel and a whole host of other commodities. Not to forget, it also generates employment, resulting an increase in overall economic activity.

The persistence of central banks to cut interest rates to stimulate demand seems to have had little effect on the slowing global economy. But then this is to be expected given that the monetary policy can take anywhere from six months to twelve months to impact the real economy, as the lower interest rates take time to percolate into the economy.

There is increasing pressure on countries to step up government spending, which is likely to have an immediate impact on demand. For example in India, to ward off the slowdown, the Government has embarked on a massive road construction program. The US too has undertaken several measures to stimulate demand. However, as is evident from the numbers, there is little respite from a slowing global economy.

In such a bleak global scenario, it is natural for investors to shun the stock markets and invest in relatively safer fixed income securities. However, even in this environment, stocks should find a prominent place in an investor's portfolio. Why do we say that?

Stock market valuations have come off dramatically from the heady days of February 2000. While a large part of the 'deflation' in valuations was justified, the markets surely seem to have gone overboard in some cases. The fallout of the September 11 attacks has only resulted in a number of these stocks becoming more attractively valued. Picking up such stocks surely presents an opportunity to buy good companies at attractive valuations.

Ofcourse, there will probably be near term hiccups. But then long-term investors need to ignore these disturbances. Ultimately what matters to them is how much money has been made over a, let's say, three-year horizon, on a point-to-point basis.

Equitymaster requests your view! Post a comment on "0.5% rate cut by BOE, ECB". Click here!


More Views on News

The Top 6 Artificial Intelligence Plays in India (Views On News)

Dec 6, 2021

Investors looking to tap into AI theme need to keep an eye on tech firm leveraging the power of AI are making things possible.

6 Penny Stocks that Rallied 1,000%+ in One Year (Views On News)

Dec 6, 2021

These penny stocks shed their penny status by surging 1,000% or more in the last one year.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

6 Indian Companies Betting Big on Renewal Energy (Views On News)

Dec 7, 2021

Here's the list of companies pouring in the big bucks to push India's sustainable energy industry to the next level.

Is it a Good Time to Trade OMC Stocks? (Fast Profits Daily)

Dec 7, 2021

This is how you should think about trading OMC stocks.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 7, 2021 (Close)