Saturday, 04 April 2015 10:23

High Interest Rates May Fall Commodity Prices

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Recently India, Turkey, South Africa and other countries raised interest rate to support their currency. Now this hike in interest rate may fall commodity prices in long run.

Simply, this interest rate hike will increase demand of fixed return providing assets which will eventually fall blocked investment in commodities. Investors would prefer more to earn risk free return than investing in highly risky commodities. This market scenario may automatically reduce commodity prices.

During the period of high interest rate borrowing cost also increases. It becomes costly for commodity players to hold inventory if its return is not more than the funding cost. It might be possible that investors dump their holdings for cost cutting. This may also reduce commodity prices in the market.

At present the interest hike by emerging countries not likely to fall commodity prices abruptly but if China and U.S. , major importers of commodities, take decision regarding interest rate then there is high possibility of price fall.

 

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