Why is interest rate important in Forex?

There are two concepts in financial economics that are commonly used in the world of investing and trading. Both concepts are inflation and interest rates (interest rate). Both inflation and interest rate Affects the value of the currency both in the eyes of domestic investors and foreign investors who buy forex aliases forex aliases.

If in the previous article Investbro.id mentioned inflation. Now is the time to discuss interest rates and how this variable affects Forex trading in particular. daily forex trading.

What is the interest rate?

interest rate (interest rate) is one of the monetary policy tools used by central banks. control the flow of money Domestically, this tool is often considered an investment advantage as it can increase purchasing power.

For example, you record a deposit in the bank in Rp 10,000,000 with 10% interest on the deposit at the maturity date. The money you get is not just Rp. 10,000,000 but Rp. 10,000,000 plus 10% or become Rp. 11,000,000.

high risk, high return. Often these macroeconomic variables are considered to be reflect riskBecause, in general, high-risk parties tend to be replaced by offerings. interest rate to investors so that they continue to be interested in investing

interest rate path

then the central bank (Bank Indonesia) will cooperate with commercial banks (Bank Mandiri, BNI, etc.) to apply this interest rate policy to its customers. in the hands of commercial banks This instrument is divided into two types: deposit interest and loan interest.

Deposit interest is the type of interest you would earn if you deposited money in the bank. On the other hand, loan interest is the interest you pay if you borrow money at the bank. The amount of interest on savings and borrowings of commercial banks must be within the reference interest rate set by the central bank.

For example, Indonesian banks use interest rate 3% per month, then commercial banks can charge interest on loans and deposits at rates of 10% and 4% respectively. The remaining 6% can be Profit (spread) commercial bank

How will the change in interest rates affect the economy?

Central banks can apply. higher interest rates If you feel that the money supply in the country is slightly excessive or the inflation rate is high, this usually happens when The country’s economy is expanding..

As a result people who dare not borrow money and also diligently saving The money is not used to buy things. A simple flow is as follows:

1. Bank of Indonesia raises benchmark interest rate
2. Banks comply with BI policy by raising interest rates on loans and savings.
3. People fear credit and save money because of high interest.
4. As a result, people do not shop in order to control inflation due to increased demand for goods.

On the other hand, if the country’s economy is sluggish The country’s central bank can also reduce the value of this instrument. The goal is for people to borrow large sums of money from banks and buy a lot of their daily or business needs and reduce their savings.

Nominal and effective interest rates

In addition to distribution channels interest rate It is also divided into two parts according to its relation to inflation. The first type is Nominal interest rate or interest rates that have not yet been deducted by inflation The second type is real interest rate or interest rate minus inflation, the formula is:

R = i + r

information:

R = Nominal interest rate

I = inflation

r = real interest rate

For example, Bank Mandiri sets a savings interest rate of 4% while Indonesia’s inflation rate is 3.5%, so the real interest rate you are entitled to is only 0.5%.

so, interest rate Because the return on investment must be higher than the inflation rate. Because if it is worthwhile, it means that the investor will not receive any profit from the investment or savings submitted at all.

Effect of Interest Rates on Forex

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Let’s remember some points from the description above:

1. interest rate It can be considered as an advantage for investors because it increases purchasing power.
2. sluggish economy, interest rate go down.
3. economic growth interest rate next.
4. High-risk parties tend to increase. interest rate to attract investors

as well as deposit investors The high interest rate is also an attractive proposition for forex traders. This is because by investment or Trade currencies with high interest ratesThey have the potential to earn Additional ability to buy other currencies at lower interest rates..

Therefore, forex traders can choose to trade currencies from countries that are experiencing economic expansion or countries with high trading risk. As a result, the demand for a country’s currency increases so that its value also increases.

An example of the effect of interest rates on exchange rates

An example is an increase in the US benchmark interest rate (Federal Capital Rates) last May At that time, the Fed raised the level. Federal Capital Rates which was exposed to 0%-0.25% during the pandemic to 0.75%-1%.

Consequences:

1. Many forex investors/traders sell rupiah to buy dollars. This can happen because although the current BI benchmark interest rate is 3.75% (above the USD), it is clear that the USD is more liquid than the Rupiah. and the size of the US economy It’s definitely bigger than Indonesia.
2. from the growing demand for the dollar and the sale of the rupiah. The exchange rate of the Rupiah to the Dollar (USD/IDR) is getting more expensive, going from $1 equivalent to 14,550 on May 11 to $1 equivalent of 14,600 -14,730 until the end of May.

In addition to influencing the preferences of traders when they want to buy a currency and the increase in the price of that currency. interest rate It also affects forex transactions through rollover and swap ratios.

Interest Rates, Correlation, Swap and Rollover

The rollover ratio is the fee a trader has to pay when he does not close a position for more than one day. Whereas a swap is the difference between the interest rates of two currencies traded. The rollover ratio is obtained by dividing the swap rate by 365 times the currency rate.

The interest rate is an important concept in the national economy. Especially in the framework of buying and selling foreign exchange (forex) exchange rates.

relationship between interest rate And forex is quite complicated because it often doesn’t just consider it. interest rate The present, but also the future, but more broadly, this article discusses the concept of the relationship between the two.