Recently, the global economic conditions have not been good due to the Covid-19 pandemic that hit in the early part of this decade. Restrictions on people's mobility have caused economic activity to slow down, resulting in many business plans being disrupted.
In addition, the decrease in company revenue has resulted in salary cuts and layoffs, which in turn have reduced people's purchasing power. The impact has been especially felt by small and medium-sized enterprises where people usually go out and shop. During Covid-19, people are afraid to go out and shop.
As a result of the negative impact caused by Covid-19, many governments around the world are looking for solutions, one of which is by providing incentives to their citizens. These incentives can take various forms, ranging from providing basic necessities, transferring cash to people's accounts, to providing loans to domestic companies for liquidity.
The problem does not stop there but also lies in where they get fresh funds to provide incentives due to the Covid-19 disaster. One way is to instruct the Central Bank to print money, which results in inflation starting to creep up around the world, causing Central Banks worldwide to raise interest rates.
Impact Of Central Bank Interest Rate
Modern economy cannot be separated from the Central Bank, as this institution controls the strength of the currency, the amount of money circulating, and provides liquidity to domestic businesses, including the banks where you deposit your money.
The Central Bank has what is called an interest rate, which has a significant impact on the overall economy. A low interest rate can be good or bad, depending on the condition, as can a high interest rate.
For example, during the COVID-19 pandemic, the Central Bank and commercial banks tended to lower interest rates to increase consumer spending. The government even reduced taxes for the purchase of certain goods. In this case, a low interest rate can encourage consumer spending and provide liquidity to domestic businesses so that they can recover after the COVID-19 pandemic.
However, after COVID-19 started to end, all countries in the world faced a new problem called inflation. Inflation occurs when the prices of goods start to rise without a clear reason. Inflation is dangerous because it not only makes the money we have worthless but also reduces consumer purchasing power.
Among the causes of recent inflation are the U.S. central bank's policy of printing trillions of dollars and the rise in global energy prices due to the Russia-Ukraine conflict. When too much money is circulating, the currency tends to decrease in value or experience inflation towards the goods in the market. In this case, the Central Bank tends to raise interest rates to pull back the money circulating in the market to return to the Central Bank.
BPS Is ?
In the interest rate set by the central bank, it is expressed in percentage format, for example 3% or 1.5%. Meanwhile, BPS stands for Basis Point which reflects the size of the interest rate offered by banks.
For example, a bank with an interest rate of 1.5% means 150 bps or 150 basis points. This is not well-known by the general public, so when the central bank announces an increase or decrease in the interest rate by a certain basis point, most people do not understand its meaning.
The term basis point itself is only popular among bankers, executives, or people involved in financial institutions. It is still unclear who coined the term basis point.
In fact, the term basis point is less than a century old. The term basis point was first used in the 1930s. Before that, the term used to refer to interest on loans was in percentage format, such as one point five percent and so on.
Impact If Central Bank Raise Rate
Our daily activities are closely related to the concept of loans. From the country we live in, the company we work for, the products we use from certain companies, to the house we live in, all involve loans.
If the central bank raises its interest rate, then every loan that uses that currency will automatically have an interest rate higher than the one set by the central bank. For example, if in December 2022, the Indonesian central bank raises its interest rate to 400 bps or 4%, then any loan you receive will be above 5%.
However, if you have a loan that you have agreed to in the past and have agreed to a flat or fixed interest rate, then if there is an increase in the central bank's interest rate, your loan will not be affected.
Nevertheless, most people tend to get bored when they have long-term plans, so the most important thing of all is to have commitment and consistency in conquering your day-to-day life for years to come.
Impact For Economy
The increase of central bank interest rates is always an indication that the economy of a country is going to slow down and there will be a wave of layoffs, as evidenced by the United States recently where only Apple has not conducted mass layoffs so far.
Why does this happen? If the central bank interest rates rise, companies needing liquidity will receive more costs than before, resulting in companies wanting to maintain their competitive edge by reducing production or service costs, and one way to do that is to reduce workers.
Why workers? Because when interest rates rise, the only market that does not experience an increase is the labor market. When interest rates rise, usually the prices of production materials will rise because they will incur additional costs if they want to get new liquidity.
In addition, because of the many predictions that state there will be a lot of layoffs, the prediction that follows is a decrease in people's purchasing power. How could it not, if more and more people are unemployed, then product or service sales will decrease.
However, with the financial storm due to the rise of central bank interest rates, a natural selection occurs regarding which companies are proven to be real and not zombies.
