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While having dinner with my family on the weekend, we talked about a bank deposit that was about to expire, and I went to the bank counter to look at the latest deposit interest rate.

Shockingly, the listed interest rate for one-year time deposits at the Bank of China is as high as 1.35%.

It’s simply too low!

Data source: Shangguan

I had been thinking that a deposit of mine was about to mature, and it would be a happy thing to have money; however, when I saw such a low interest rate, I was no longer happy.

In fact, our deposit interest rates have also been glorious in history.

For example, in 1996, the one-year fixed deposit interest rate of the Bank of China was about 10%, and the interest rate was even higher before that.

It's really good. This is higher than the current trust and third-party financial management.

However, over the past 30 years, our interest rate trend has been moving downward step by step.

Where is the end?

Former Federal Reserve Chairman Paul Volcker once said that interest rates are like weapons. Only when used correctly can they achieve the greatest effect.

Only by predicting the interest rate can you better protect every penny your family has worked hard to earn.

Therefore, I would like to throw out some ideas this time and explore the possible extreme limits of domestic interest rates from both subjective and objective perspectives to give you a reference.

Let’s start from a subjective perspective and make a bold guess about the interest rate limit.

According to CCTV News, recently, Pan Gongsheng, the governor of the central bank, said in an interview with the media that in terms of real estate policy, the down payment ratio for mortgage loans has now been reduced to 15%, which is the lowest down payment ratio in history. The interest rate is also at a very low level.

This is the most recent statement made by the central bank, and the meaning is very simple, that is, there is very limited room for further reductions in mortgage down payments and monetary interest rates.

What is the reason?

You can refer to the leader’s speech at the Lujiazui Financial Conference in June.

When he mentioned the risk event of Silicon Valley Bank in the United States, he particularly emphasized that at present, we should pay special attention to the maturity mismatch and interest rate risks of some non-bank entities holding a large number of medium- and long-term bonds.

What this means is that some financial institutions hold a large amount of long-term government bonds and should pay attention to the risks.

What are the risks?

Clearly a risk similar to Silicon Valley Bank.

How did Silicon Valley Bank’s risks come about?

Let me explain this to you in more detail. Understanding this will be of great help in understanding our current domestic policies.

During the global economic downturn in 2020, the United States significantly lowered its monetary interest rates and implemented zero interest rates. Silicon Valley Bank purchased a large amount of U.S. Treasury bonds.

At this time, interest rates in the United States are very low and the price of government bonds is very high.

Even so, "Silicon Valley Banks" are still buying at high prices.

Does this scene seem familiar?

The United States has been implementing a low-interest rate monetary policy for more than a decade, and Silicon Valley Bank buys government bonds, so there shouldn't be any major risks.

However, there are always unexpected things.

No one could have imagined that the US economy could go directly from ICU to KTV, and from economic downturn to overheating.

In March 2022, the United States began a cycle of interest rate hikes in response to economic overheating.

In just over a year, interest rates rose directly from 0 to over 5.25%.

US interest rates have risen sharply.

Treasury bond prices fell sharply!

Data source: Wenhua Finance

The tragedy of the "Silicon Valley Banks" began. The prices of the large number of bonds in their hands continued to fall, and coincided with a run on banks by depositors.

It never rains but it pours.

America's "Silicon Valley Banks" went bankrupt one after another, and shareholders of all listed companies lost all their money.

This is a brief review of Silicon Valley Bank’s risk events.

The root cause of these risks is the reversal of interest rates, from low to high and from high to low in government bond prices.

Now, think about our current situation.

What does it mean that central bank leaders have publicly expressed on various occasions that they want to learn from the risk lessons of Silicon Valley Bank?

Remember, SVB's risk only occurs if interest rates reverse, only if interest rates move from a low range to a high range.

So doesn't this remind us that

Our current interest rates are already close to the low price range, and there is very little room for further decline? On the contrary, once the economy recovers, interest rates may reverse?

So don’t easily fantasize about zero interest rates or negative interest rates!

So don’t blindly chase the rise in long-term government bonds!

Next, let’s discuss the extreme position of interest rates from the perspective of objective data.

According to China Daily, in July, the national consumer price index (CPI) rose by 0.5% year-on-year, and rose by 0.5% month-on-month, compared with a decline of 0.2% in the previous month. (See the figure below)

That is to say, domestic CPI data is gradually improving and prices are gradually resuming their rise.

Putting aside the physical feeling, just looking at the data, if the CPI continues to rise, inflation will rise, the economy will recover weakly, and there will be little point in continuing to cut interest rates.

The reason is simple. If interest rates continue to fall and prices continue to rise, the economy will easily overheat.

This is like the scene in the United States around 2021.

Data source: Wind

So objectively speaking, as long as our price level moves in an upward direction, as long as our price level is within a reasonable range, such as around 2%.

Not only should interest rate cuts be stopped.

We may even need to observe whether it is necessary to raise interest rates to prevent the economy from overheating.

For example.

Vegetable prices are rising across the country. Take Shanghai's cucumbers for example. They sold for 1.8 yuan in mid-June, 4.6 yuan in late July, and 6.3 yuan on August 14.

In two months, the price has more than doubled.

The prices of other fruits such as lettuce, eggplant, and beans have also risen to varying degrees.

It is worth noting that this wave of price increases for agricultural products are all seasonal products.

However, there are still many agricultural products that have not yet been put on the market and have shown signs of reduced production due to high temperatures or heavy rains; as these agricultural products are subsequently put on the market, their prices will likely continue to rise.

For example, corn, soybeans, peppers, etc.

Once the price goes up, it is not easy to lower it again. This rule is more obvious in agricultural products.

Because in addition to the shortage of supply and the inability to increase production,

The funds of some speculators will also stir up trouble in the middle, which is also due to the excessive liquidity of funds.

I don’t really care what causes the increase in vegetable prices, because it is likely to be an increase in CPI and inflation.

What is the result?

If there is weak inflation, lowering interest rates is obviously no longer appropriate!

Finally, I would like to briefly talk about the monetary policy game between China and the United States.

Our current monetary interest rate is 1.7% for 7-day reverse repurchase, Japan is close to 0%, and the United States is 5.25%.

Japan is a case in point, with the yen soaring and plummeting, and the currency is not stable enough;

The root cause is that ultra-low interest rates make the space for monetary adjustment very passive and rigid.

Therefore, our interest rates are already very low and we cannot easily lower them further under any circumstances.

This will leave more flexibility for cross-cycle and counter-cycle activities during special periods!

In summary, the seven-day reverse repurchase rate of 1.7% is the bottom range of China's current interest rates; even from a longer-term perspective, this position is not far from China's ultimate interest rate target.

At this time, the pessimists are right and the optimists make money.

By the way, if you agree with this view and are interested in this logic, you can scan the code below for free and join【Teacher Hui Jing’s exclusive community】。

I will share the organization's cutting-edge strategies in the community and also broadcast live in the community privately.Let’s talk about the practical aspects of asset allocation and tell the truth that is inconvenient to say.

certainly,If you have any questions, please ask them in the community, I'd be happy to answer them.

THE END

Source: Mikuang Investment (ID: mikuangtouzi)

Author: Hui Jing

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