Group 2: What Have Been the Recent Changes in Monetary Policy Around the World, and What are the Implications on Different Asset Classes (Public Equity, Fixed Income, Private Equity, etc.)?

Question 1

what is monetary policy

Answer 1

the process by which a country’s central bank, such as the Federal Reserve in
the US or the Bank of Canada, manages the supply of money to achieve specific economic goals

Question 2

what are examples of specific economic goals that central banks have

Answer 2

• Controlling inflation
• Increasing employment
• Promoting economic growth

Question 3

what are 3 main tools central banks have

Answer 3

• Open-market operations
• Changes in reserve requirements
• Changes in the overnight rate

Question 4

what monetary tool does the bank of canada currently use

Answer 4

the overnight rate

Question 5

what is the bank rate

Answer 5

The interest rate charged by the Bank of Canada on loans to commercial banks

Question 6

how much does the bank of canada pay commercial banks when commercial banks hold money in the bank of canada

Answer 6

bank rate - 0.5%

Question 7

what is the overnight rate

Answer 7

The rate of interest on very short-term loans between commercial banks

Question 8

how much is the overnight rate usually

Answer 8

be about 1/4% below the bank rate

Question 9

how can the bank of canada change the money supply

Answer 9

• by changing the bank rate, which will cause an equal change in the overnight rate
• A higher overnight rate discourages banks from borrowing reserves from the Bank of Canada, so it will reduce the quantity of reserves in the banking system, reducing the money supply (they do this when they want to lower the money supply)
• A lower overnight rate encourages banks to borrow from the Bank of Canada, increasing the quantity of reserves, and increasing the money supply (they do this when they want to increase the money supply)

Question 10

why does the overnight rate matter

Answer 10

it sets the pattern for all canadian interest rates

Question 11

what are open market operations

Answer 11

The purchase or sale of government of Canada bonds by the Bank of Canada

Question 12

how would the bank of canada increase the money supply

Answer 12

• buy treasury bills
• bank of canada are like the creator of money
• they by government bonds, giving money to the market
• more money is circulating = more money supply

Question 13

how would the bank of canada reduce the money supply

Answer 13

• sell the government bonds to the public
• the public buys the bonds from them
• the bank of canada holds the money and doesn’t give it out anymore
• reduces the amount of money in circulation

Question 14

what is quantitative easing

Answer 14

The purchase by the central bank of non-government securities or government securities with long maturity terms

Question 15

what is quantitative tightening

Answer 15

• The sale by the central bank of non-government securities or government securities with long maturity terms
• also not reinvesting in bonds that mature

Question 16

what are reserve requirements

Answer 16

Regulations on the minimum amount of reserves that banks must hold against deposits

Question 17

how can money supply decrease with reserve requirements

Answer 17

• increase reserve requirements
• makes banks hold more reserves
• holding more reserves = they can loan out less money
• loaning out less money is less money they can make money out of (interest)
• money supply decreases

Question 18

how can money supply increase with reserve requirements

Answer 18

• decrease reserve requirements
• makes banks hold more less reserves
• holding less reserves = they can loan out more money
• loaning out more money is more money they can make money out of (interest)
• money supply increases

Question 19

which countries don’t have reserve requirements

Answer 19

• canada
• uk
• new zealand
• australia
• sweden

Question 20

why do some countries not have reserve requirements

Answer 20

• they just don’t
• instead they have capital requirements (must hold a certain amount of capital)
• capital requirements help reduce the losses on loans and investments

Question 21

what is expansionary monetary policy

Answer 21

• policies made to increase the money supply and boosting economic activity
• done by keeping interest rates low to encourage borrowing

Question 22

what is contractionary monetary policy

Answer 22

• policy to reduce money supply aka fight inflation
• done by putting higher interest rates to discourage borrowing and encourage saving

Question 23

why did the US recently cut interest rates

Answer 23

• they put high interest rates since 2022 (5.5%), which have been to fight inflation and to stabilize prices that were increasing significantly (after the pandemic)
• but they didn’t want it to be so high that it would restrict borrowing so much and end up hurting the US economy
• especially since inflation has be decreasing since the interest rate increase
• so they cut it by 0.5% (expansionary policy)
• they are aiming to have it around 4.75%-5%

Question 24

what does monetary policy have to do with unemployment

Answer 24

• when interest rates are low, companies can borrow more money
• when they have more money they can spend it to invest in more projects or hire more people (more money can be given out as wages)
• when interest rates are high, they borrow less money
• they have less money to spend on projects and therefore can’t afford to have many workers (unemployment) let alone hire them

Question 25

what kind of monetary policies did countries have during covid

Answer 25

- expansionary policies - done to increase the money supply, reduce unemployment and boost growth

Question 26

what kind of expansionary policies were done

Answer 26

- lowering interest rates: central banks lowered the rates to near zero (canada's was set to 0.25% - buying back government securities (open market operations)

Question 27

what kind of monetary policies are countries doing after covid

Answer 27

- contractionary monetary policies - like increasing interest rates to incentivizes saving and making it harder to borrow - they are trying to control inflation to about 2%, which is their goal - they consider it the % that maintains price stability while providing enough protection against deflation

Question 28

what contractionary monetary policy did the european central bank do

Answer 28

increased rates from 0% in June 2022 to 4% in september 2023 across 9 separate increases

Question 29

are increase interest rates actually reducing inflation

Answer 29

- according to the international monetary fund (IMF) global inflation is falling - it went from 6.8% in 2023 to 5.9% in 2024 - its projected to fall to 4.5% in 2025

Question 30

what happened to stocks (public equity) during covid

Answer 30

- central banks had expansionary policies where they cut interest rates - cutting interest rates reduces the cost of borrowing, allowing businesses to get capital at lower prices, which they can invest in growth and maybe increase profit - because of this, investors increased their investment in stocks, expecting higher returns from the company

Question 31

what happened to stocks (public equity) after covid

Answer 31

- central banks had contractionary policies where they increased interest rates to fight inflation - it increased the cost of borrowing, making it more expensive for businesses to get capital so they didn't borrow that much - this made it hard for a company to finance operations and expansions, which slowed their growth and shrunk their profit margins - because of the fall in performance, the stock prices began to fall

Question 32

what about the monetary policy changes on private equity

Answer 32

- moves similar to the public equity market - except the market is less liquid than the public equity market (less buyers and sellers, and investments are more longer-term ones) - because of this, private equity has a slower impact on the policy changes

Question 33

what are different asset classes

Answer 33

- public equity (stocks) - private equity - fixed income (bonds) - real estate

Question 34

what happened to bonds (fixed income) during covid

Answer 34

- expansionary policy has an inverse relationship for bonds - when interest rates are lower, it means that newly issued bonds have lower yields (lower interest payments) - so the demand for newly issued bonds decrease - but it also means that existing bonds have higher yields than new ones, increasing the demand for existing bonds and therefore increasing the price of them - or people just move to something with higher returns like stocks over bonds

Question 35

what happened to bonds (fixed income) after covid

Answer 35

- when interest rates are higher, it means that newly issued bonds have higher yields (higher interest payments) - so the demand for newly issued bonds increase - it also means that existing bonds have lower yields than new ones, decreasing the demand for existing bonds, and decreasing their prices - this happens for more long-term bonds, so investors prefer short-term bonds to reduce their risk - so when interest rates are higher people like to invest in more bonds instead of stocks

Question 36

what happened to real estate (houses) during covid

Answer 36

- low interest rates during the pandemic - made it more affordable to mortgage - cheaper mortgages = more houses bought - more houses bought = less houses available = houses become more expensive

Question 37

what happened to real estate (houses) after covid

Answer 37

- interest rates were increased to fight inflation - caused mortgages to be more expensive and slow down the housing market

Question 38

what happened to office spaces during covid

Answer 38

- people worked from home - so offices were either temporarily or permanently empty (vacancy rates increased) - some companies even shifted to remote or hybrid work models increasing the vacancy - people became more cautious about purchasing office spaces since they were now unsure about the demand for them even though interest rates were low

Question 39

what happened to office spaces after covid

Answer 39

- hybrid work models still were popular - with some companies still not having full time in office work, there are still pretty high vacancy rates (18.5%)

Question 40

what happened to retail spaces during covid

Answer 40

- many brick-and-mortar stores especially small businesses were forced to close temporarily or permanently - ecommerce boomed, so the demand for physical retail spaces decreased

Question 41

what happened to retail spaces after covid

Answer 41

- high-end retail and essential services (like groceries) recovered pretty quickly - smaller businesses and traditional department stores struggled - ecommerce remains dominant - many retailers have both online and in store channels

Question 42

what is deflation

Answer 42

- when the prices of goods decreases, meaning the purchasing power of money is higher - this can be good initially as consumers are able to buy more with the same money they have - however with lower prices, companies would be earning less - with less profits, companies may end up laying off employees to save costs, which would reduce the disposable income of individuals, causing them to in turn, spend less