Central banks raise or lower interest rates to manage a country’s overall economic health.
For example, policymakers can raise interest rates to discourage spending and promote saving, or lower interest rates to encourage borrowing and boost spending.
Most countries have their own benchmark interest rates. For example, the Hong Kong Monetary Authority (HKMA) has its Base Rate, while the US Federal Reserve (the Fed) has the Federal Funds Rate (FFR).
In the markets, financial institutions also use different benchmark interest rates to price their commercial and consumer lending products. For example, there is the Hong Kong Interbank Offered Rate (HIBOR), which is used to price housing loans and interest rate swaps, while Australia’s Bank Bill Swap Rate (BBSW) is used to price derivatives and other securities.
Why should investors bother with the switch from LIBOR to SOFR? How will this change affect you?
One main reason why you must be interested in the SOFR is because it will increasingly be used by financial institutions as a reference rate to price their investment and lending products that you buy.
And here is the second reason why investors such as you, should pay attention to the SOFR. As mentioned earlier, the SOFR has replaced LIBOR as the reference rate used by many financial institutions to price their commercial and consumer lending rates.
Bottom line
Investors who are serious about working their hard-earned money harder must pay attention to the factors that can impact their investment returns. Interest rate movements, for example, of the SOFR, is one data point that you must monitor. But it is not the only key indicator to track, to preserve and enhance your wealth. Speak to your investment adviser or relationship manager about how having knowledge of the markets can help you make informed investment decisions.
Check out our previous article
Investing in a rising interest rate environment
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