Financial terms and what they really mean

What is a sovereign bond? It is a piece of paper issued by governments to raise money for their respective countries. It makes a debtor out of the government and a creditor out of bond investors. The paper will state the government’s promise to repay after a certain number of years and the interest charged. You can think of it as the government writing an IOU note.What is monetary policy easing?It’s a complicated way of saying “print more money and cut interest rates”. Interest rates are the price of money: the more you flood the economy with money, the lower interest rates become, the more money will be borrowed by businesses to grow and expand.The opposite of easing is tightening i.e. to raise interest rates as if to tighten the money tap. The person (sort of) in charge of making this policy are central bank governors after sleuthing how the economy is doing and consulting with their colleagues. Those who think interest rates should go up are called “hawks” and those who think interest rates should go down are “doves”.What is a benchmark rate?It’s the interest rate at which the central bank lends money to commercial banks and sets the pace for the price of money. The benchmark rate and its direction summarise how well or how badly an economy is doing. Rising interest rates mean businesses are doing well so hawks want to slow down growth. Falling interest rates mean the economy may be sickly so doves want to cut rates.What about deflation?     We used to be freaked out about inflation because rising prices reduce the value of money and raise cost of living. Now economists are also freaking out about deflation because falling prices cause businesses to fire people resulting in high unemployment even to the extent of collapsing the economy. Raising interest rates takes care of inflation and lowering them deals with deflation. The world is afraid, very afraid, of deflation right now.What does it mean when a currency goes up or down?Falling or rising interest rates complicate things for currencies. If the price of money is low (interest rates going down), foreign investors will find your currency less attractive and sell it, resulting in your currency’s weakness. Currently, there’s an expectation that US interest rates are going up because apparently their economy is doing better, so investors are selling the ringgit.It’s also a double whammy because these investors/speculators also expecting the ringgit to be affected by things like 1MDB, the oil price crash etc. By the way, Bank Negara Governor Tan Sri Zeti thinks the ringgit is undervalued. What all this means, however, is that central bank governors, bankers, traders and business Radio/TV station talking heads (like me) still have a job.Julian Ng is a producer/presenter on BFM 89.9′s The Morning Run on weekday mornings from 7 am – 10 am.