Pros and Cons of Rate Cuts: A Strategic Guide for Homeowners, Savers, and Investors
“Rate reduction” is one of the core tools of the central bank's loose monetary policy, but do you really understand its full impact on the overall economy and personal life? Why did the central bank cut interest rates? What are the disadvantages of falling interest rates for borrowers, depositors, and investors?
Starting with a basic concept, this article will systematically analyze how falling interest rates work, the benefits and potential harms, to help you fully understand this key policy that affects every person's portfolio.
First, what is interest rate reduction? White Speech Full Explanation
Interest Rate Cut, refers to the central bank's monetary policy means of lowering the “benchmark interest rate”. Simply put, the central bank lowers the interest rate on which commercial bank funds are supplied, thereby affecting the cost of borrowing across the financial system.
SIMPLE ANALOGY: LIKE A RESERVOIR ADJUSTING THE WATER LEVEL
Imagine the central bank as the manager of a large reservoir:
- Decrease in interest: Open the gates to allow more funds to flow to the market, stimulating economic activity
- Rising interest rates: Close the door, reduce the flow of funds in the market and cool down the overheating economy
When the central bank lowers interest rates, the cost of borrowing money from the central bank decreases, and the lending rate for businesses and individuals naturally decreases. This makes the same sense as wholesale prices fall, and retail prices follow the fall.
Three key interest rates for central bank cuts
The Central Bank of Taiwan will simultaneously reduce the following three policy rates when lowering interest rates:
Source: Resolution of the Supervisory Board Meeting of the Central Bank of Taiwan in March 2020
For the latest interest rates, please visit the official website of the Central Bank: https://www.cbc.gov.tw/
In addition, the central bank may also reduce the “deposit readiness rate” at the same time, requiring banks to hold less capital to allow more funds to flow to the market and further expand credit.
Second, why should the interest rate be lowered? The main purpose of the central bank's interest rate reduction
🔑 Objective 1: Stimulate economic growth (the main reason)
When economic growth slows or falls into recession, the central bank boosts the economy by lowering interest rates. Reducing borrowing costs can encourage business investment and public consumption and drive overall economic activity.
Operational logic:
Decrease in interest
↓
Lower borrowing costs → Businesses are more willing to expand borrowing
↓
Lower deposit rates → People are more inclined to spend rather than save
↓
Increase in market liquidity → Economic activity heats up
↓
GDP Growth Accelerates
Taiwan Practical Case (2020):
- Taiwan GDP faces downward pressure on COVID-19
- ECB to cut emergency interest rate by 1 pc (0.25%) in March 2020
- In line with fiscal stimulus policies, Taiwan's GDP will continue to grow at 3.36% in 2020
🔑 Objective 2: Fight against the tightening of supply
Fluctuation (continued fall in prices) is more terrible than inflation, as people expect prices to be lower and will delay consumption, resulting in:
Price Falling → Consumption Delayed → Corporate Income Decrease → Cutters' Salary Reduction → Less Consumption → Prices Fall Again
This “constriction spiral” is extremely difficult to break once it forms. A fall in interest rates can increase market capital and push property prices back to reasonable levels.
Historical case:
- Japan's 'Lost Decade' in the 1990s: Long-Term Cuts Policy Mistakes That Could Stimulate the Economy Even With Interest Rates Near Zero
- Lesson learned: Interest rate cuts must be timely and forceful, otherwise the effect is limited
🔑 Goal 3: Stabilize financial markets
In the event of a financial crisis or severe market turbulence, a reduction in interest rates can:
- Inject liquidity into the market to prevent credit tightening
- Reducing the Risk of Business Downturn
- Stabilize the financial system and prevent systemic risks
Typical case:
- 2008 Financial Tsunami: Fed Cuts Emergency Rate to 0-0.25%
- 2020 New Crowne Crisis: Global Central Banks Collectively Cut Interest Rates to Avoid Financial System Collapse
🔑 Goal 4: Lower the domestic currency exchange rate and increase export competitiveness
A fall in interest rates often leads to a depreciation of the domestic currency, which is beneficial to the export-driven economy, as the depreciation increases the international competitiveness of exported products.
Special Considerations for Taiwan:Taiwan is a highly export-dependent economy, and exchange rates have a significant impact on exporting enterprises. But the Bank of Taiwan is relatively conservative in its exchange rate policy and will not cut interest rates simply for the sake of depreciation.
Third, the “benefits” of lowering interest rates: who can benefit from it?
✅ Benefit 1: Reduced mortgage burden (most felt)
The most direct benefit of lowering interest rates is to make loans cheaper. Floating interest rate loans such as home loans, car loans, loans, etc., reduce the amount of monthly payments.
📊 Mortgage family impact calculation (return on average of the interest)
Assumption condition:
- Loan Amount: 1 million USD
- Loan term: 30 years
- Interest rate: 2.5%
- Interest rate after interest rate: 2.0% (interest rate reduction of 2 pips)
💡 Online calculation tool:
- Bank of Taiwan Mortgage Calculation
- OFFICIAL WEBSITE CALCULATION TOOLS FOR MAJOR COMMERCIAL BANKS
⚠️ Notes:
- A reduction in interest rates does not mean that the bank must immediately reduce your mortgage rate
- Floating rate mortgages are usually adjusted every six months or annually
- Some banks have a floor rate
✅ Benefit 2: Reduced operating costs of enterprises, favorable investment expansion
When the financing costs of the enterprise are reduced:
- More funds available for R&D, equipment investment, talent recruitment
- Cash Flow Improves, Financial Stress Relieves
- The benefits of capital-intensive industries (manufacturing, technology) are particularly evident
Business financing cost comparison:
Positive chain effect:
Lower financing costs→Expanding investment→Creation of jobs→Increase in public income→Increase in consumption→Increase in corporate income
✅ Benefit 3: Stock markets generally benefit and asset value increases
The positive impact of falling interest rates on the stock market comes from several directions:
- Flow of funds to the stock market: Lower deposit rates, investors turn to stocks for higher returns
- Business Valuation Enhancement: Profitability in the future at lower interest rates and higher present value
- Reduced financing costs: Corporate profits improve, share price gains support
Historical case:
- S&P 500 rises more than 70% in 12 months following emergency US interest rate cut in March 2020
- Taiwanese stocks also rebounded quickly from lows in the second half of 2020 to hit all-time highs
⚠️ But not absolutely:
- If the rate cut is due to the rapid deterioration of the economy, the stock market may fall at the same time (the bad news outweighs the easing of earnings)
- Markets may have reacted ahead of expectations of interest rate cuts
✅ Benefit 4: Bond investors benefit (price increases)
Bond prices and interest ratesSlope Board Relationships— Interest rates fall and bond prices rise.
Reason:
- The interest rate on your old bonds is higher (like 3%)
- Lower interest rates on newly issued bonds (e.g. 2%)
- Market seizes old bonds with high interest rates, pushing up prices
Benefit Level:
- Higher gains in long-term bonds (10-year, 20-year)
- Smaller impact of short-term bonds
Taiwan investors may refer to:
- Bond-Based Funds
- U.S. Bond ETF (e.g. 00679B, 00687B, etc., subject to exchange rate risk)
✅ Benefit 5: Increased competitiveness of export industry
A fall in interest rates usually leads to a depreciation of the domestic currency, and the export-oriented industry is Lido:
- Taiwan products are relatively cheap in the international market, increasing competitiveness
- Beneficial for orders and increased market share
- Taiwan's technology and traditional manufacturing industries benefit
Actual number concept:If the NTD dropped from USD 30 million to USD 32 million due to a decrease in interest rates, the NTD revenue increased from USD 3 million to USD 3 million, an increase of about 6.7%.
✅ Benefit 6: Increased desire to consume, economic circulation
With lower interest rates on deposits, people are more willing to spend rather than save:
- Increased consumption drives merchant revenue
- Merchants expand their investments
- Formation of a favorable economic cycle
SPECIAL BENEFICIARIES:
- Entrepreneurs in need of loans (reduced financing costs)
- Rehomemakers in need of a home exchange (reduced mortgage stress)
- Capital intensive SMEs
Fourth, the “bad” of lowering interest rates: Who will be hit?
❌ Bad point 1: Fixed income decreases in interest income (most noticeable)
This is the most direct injury to conservative investors by falling interest rates.
📊 Settlement family impact calculation
Most impacted families:
- Retirement Families: Relying on Interest Subsidies for Living Expenses
- CONSERVATIVE INVESTORS: UNWILLING TO TAKE INVESTMENT RISKS
- Large deposit accounts: Interest income is the main source of passive income
Adaptation strategy (see Chapter 6 for details)
❌ Bad point 2: Inflationary pressure may rise
Too much capital in the market may push prices higher:
Risk situation:
- If interest rates fall, the economy is close to full employment
- Pursuit of large amounts of money for limited goods and services
- Rapid price rises, eroding purchasing power
Invisible loss of physical purchasing power:
Real interest rate = nominal interest rate - inflation rate
Example: Fixed deposit rate 2.0%, inflation 3.0%
→ REAL INTEREST RATE = -1.0% (PURCHASING POWER SHRINKS 1% PER YEAR)
History Lessons:
- 2020-2021 Global Bank Massive Rate Reduction+Quantitative Easing
- Global inflation soars to 40-year high in 2022
- Some countries have more than 8-10% inflation, triggering a cost-of-living crisis
❌ Downside 3: Increased risk of asset bubbles
Long-term low interest rate environments may result in excessive concentration of funds in specific assets:
Foam forming mechanism:
Low Interest Rates → Funds Seek Higher Returns → Massive Influx in Stock Market and Housing
↓
ASSET PRICES RISE RAPIDLY, AWAY FROM FUNDAMENTALS
↓
Bubble formation → bubble bursting → financial crisis
Historical case:
- 2000 Tech Bubble: Low Interest Rates Help Propel Net Company Valuation Bubble
- Debt crisis of 2008: prolonged low interest rates create a bubble in the US housing market
- 2021-2022 Various Asset Bubbles: Cryptocurrencies, Tech Stocks, Housing Markets Rise and Fall
Special attention in Taiwan:Taiwan's housing prices have risen rapidly in recent years, and the low interest rate environment is one of the key drivers. For young people who have yet to buy a home, a housing bubble is a potential wealth distribution issue.
❌ BAD POINT FOUR: IMPORT PRICES RISE, CONSUMPTION COSTS INCREASE
The fall in interest rates causes the currency to depreciate and, while benefiting exports, has a negative impact on imports:
Everyday life under impact:
- Imported food (fruit, coffee, beef, etc.) becomes more expensive
- Imported electronics and car prices rise
- Increase in the cost of traveling abroad and overseas consumption
- Increased production costs for companies that rely on imported raw materials
Calculation concept:If the NTD drops from $30/USD to $32/USD due to interest rates:
- ONE IMPORTED CAR WITH AN ORIGINAL PRICE OF USD 3 MILLION: THE COST OF TAIWAN DOLLAR INCREASED FROM 90 MILLION TO 96 MILLION (+6.7%)
- One-time European trip of $2,000: Taiwan dollar spend increased from 6 million to 6.4 million (+6.7%)
❌ BAD 5: COMPRESSION OF PROFIT SPACE IN BANKING
The main source of profit for banks is the “spread” (deposit rate - deposit rate):
Impact of interest rate reduction:
- The rate of decline in the deposit rate sometimes exceeds the deposit rate
- Margin narrows, bank profits per deposit decrease
- Bank stocks (financial stocks) generally perform poorly in low interest rate environments
Impact on investors:
- Investors in financial stocks may face a drop in stock prices or a cut in dividends
- The investment income of the life insurance company may also be affected
❌ BAD POINT SIX: MAY DELAY INDUSTRY ADJUSTMENT, FORMING A “ZOMBIE ENTERPRISE”
Too low interest rates can make less efficient businesses survive on low-cost loans:
The phenomenon of “zombie enterprise”:
- The company should be shut out of the market, but survive on low interest rates
- Seize credit resources to squeeze out more efficient startups
- Long-term damage to economic innovation capacity and productivity
Alerts in Japan:Japan maintained ultra-low interest rates in the 1990s and a large number of zombie enterprises were considered one of the reasons why the “lost decade” was difficult to get out.
❌ Bad point 7: Decreased willingness to save, reduced long-term capital supply
With low interest rates on deposits, people's willingness to save has decreased:
- Long-term capital supply may be insufficient in the banking system
- Impact on the country's overall investment capacity
- Overspending replaces savings, which could bury the seeds of a future financial crisis
5. A list of interest rate reductions impact｜Who benefits? Who is the victim?
Sixth, the complete comparison of the decrease and the increase
Understanding a fall in interest rates must be understood at the same time as its place throughout the monetary policy cycle.
Raise vs. Decrease Full Comparison Chart
Taiwan's Recent Rising Interest Rate History
Decrease in interest rates (2020):
- March 2020: Interest rate dropped by 1pc to 1.125% reload rate due to COVID-19
- Objective: Prevent the impact of the pandemic from triggering economic recession
Increase (2022-2023):
- March 2022 to March 2023:5 consecutive rate increases, cumulative increase of 2.5 pips
- Reason: Global inflation heats up, Taiwan follows tightening
Current situation (after 2023):
- Interest rates remain high and have not entered a cycle of falling interest rates
- For the latest news, please inquire:Central Bank Official Website
How to determine if the next step is a decrease or an increase?
Observation indicators:
7. FAQ Q&A
Q1: Will a drop in interest rates necessarily make the stock market rise?
A: Not necessarily, let's look at the reasons for the decrease in interest rates.
Scenario 1: Lower interest rates due to controlled inflation (Lido)
- Indicates that the economy is healthy but inflation is under control
- Stock markets generally react positively
- This is what the Fed's 2019 “precautionary rate cut” looks like
Scenario 2: Urgent interest rate cut due to economic collapse (not necessarily Lido)
- Bad news (economic deterioration) may overshadow good news (interest rate cut)
- In the financial tsunami of 2008, Univision sharply lowered its interest rate, and the stock market continued to fall
Key: Identify “Why interest rates are falling” is more important than “is there no rate cut”.
Q2: What should I do after the interest rate drops?
A: Three-step adjustment.
Step 1: Calculate the true lossCalculate how much the interest rate will decrease in the year after the rate cut and confirm the extent of the impact.
Step 2: Assess risk tolerance
- Totally unable to bear the loss of principal → Maintaining regular deposit+short-term debt
- TOLERATES SMALL FLUCTUATIONS → JOIN BOND FUND, HIGH DIVIDEND ETF
- Can withstand moderate volatility → Join a stock-based ETF
Step 3: Convert in batches, don't move them all at onceAvoid buying risky assets in bulk at market highs.
Q3: Should I buy a house in a low interest rate environment?
A: Multiple factors need to be considered at the same time.
Factors that support buying a home:
- Lower mortgage rates and lower monthly repayment burden
- Lower interest rates may push up house prices, making it more expensive to buy later
Factors against buying a home:
- Lower interest rates have often pushed up house prices, and entry costs are higher
- Mortgage burdens will rise again if interest rates rise in the future
- It is not advisable to buy a house because of low interest rates that exceed your financial capacity
Evaluation criteria (recommended):
- 30-40% of monthly income for mortgage loans
- At least 20-30% of your own deposit
- Consider whether it is still affordable after a 1-2% rise
Q4: How long will the interest rate decline last?
A: Depends on inflation and economic recovery.
Historical reference:
- US interest rate decline after 2008: Low interest rates remain for about 7 years (2008-2015)
- US interest rate decline after 2020: Low interest rates will remain for about 2 years (2020-2022)
- The time difference is huge and difficult to predict
Influencing factors:
- Does the inflation rate rise above the target
- Is there a full recovery in the employment market
- The global economic environment (especially in the direction of the United States Congress)
Specialties of Taiwan:Taiwan's central government policy is often referenced by the Fed, but is not fully followed by adjustments based on Taiwan's local inflation, exchange rates, and economic conditions.
Conclusion: Understand the decline in interest rates, only to respond from tolerance
Interest rate cuts are a powerful tool for the central bank to regulate the economy — stimulating demand and stabilizing markets when recession or contraction threatens. But like any potent drug, falling interest rates have side effects: shrinking fixed income, inflationary pressures, risk of asset bubbles, and more are all costs to be considered.
Understand the three keys to lowering interest rates:
- See the causes, not just the results — The reason for the rate cut is more important than the rate cut itself
- Different families affect differently — Mortgage benefits, settles family victims, there is no absolute good or bad
- Actively adjust rather than passively accept — Understand the impact so you can make financial decisions that are right for you
Understanding the pros and cons of lowering interest rates is not to predict the central bank's next steps, but to be able to see more clearly the impact on one's own finances in an environment of changing monetary policy and thus make more rational judgments.
💡 Useful resources
Official information:
- Central Bank of Taiwan — The latest interest rate policy, minutes of supervisory meetings
- Main Office of the Administrative Council — Economic data such as CPI, GDP, etc.
- Financial Supervisory Board — Financial Institutions Enquiry, Investor Protection
Calculation Tools:
Financial Media:
- Business Times, Economic Daily — Interest Rate Policy Analysis
- Sky Magazine, Business Weekly — Global Economic Trends
Disclaimer
This article is for educational and informational purposes only and does not constitute any form of investment advice, legal advice or tax advice.
Important Reminder:
- Interest rate reduction policies involve complex overall economic factors, and the actual effects may vary depending on the economic situation and the market environment
- Any investment decision should be based on the investor's own research and judgment and a prudent assessment of risk tolerance
- Past performance does not guarantee future results
- Historical data in this article has been made every effort to ensure accuracy, but relevant policies and market conditions are subject to change at any time
- Readers are advised to check with regulators or professionals for updates on their own
The HKMA reminds: “Investments must be risky. Please read the relevant documentation before applying for a purchase.”
Investing is risky. Please be careful before making a decision.
