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you should read how FED uses fed fund rate to influence interest rate to have a better understanding about how interest rate affects LONG TERM money supply.
of course, central banks can do repo or reverse repo to control SHORT TERM money supply as repo or reverse repo only for month or a few months at most.
in short, if FED raises fed fund rate, it will increase the cost of interbank loan, which eventually will increase the borrowing cost of economy activity.
the same can be used by MAS. but I am not sure what benchmark interest rate MAS is using, or MAS never has one, lol.
let me explain further how FED manipulates interest rate through fed fund rate.
assume, FED sets fed fund rate to 2%, although it does not mean that immediately interbank loan will be charged at 2% (banks may call FED bluff). But all funds lent to FED will earn an interest rate of 2%. would you as citi bank lend to bank of America at 1.5% or lend to FED at 2%? obviously, interbank liquidity will dry up which will push interbank loan rate so that the interbank loan interest rate will eventually around 2%. if interbank loan interest rate is 2%, eventually, commercial bank loan will reflect the cost of fund (interbank loan, in Singapore context, SIBOR) and increase the loan interest rate to general business activities.
please correct me if I am wrong.
of course, central banks can do repo or reverse repo to control SHORT TERM money supply as repo or reverse repo only for month or a few months at most.
in short, if FED raises fed fund rate, it will increase the cost of interbank loan, which eventually will increase the borrowing cost of economy activity.
the same can be used by MAS. but I am not sure what benchmark interest rate MAS is using, or MAS never has one, lol.
let me explain further how FED manipulates interest rate through fed fund rate.
assume, FED sets fed fund rate to 2%, although it does not mean that immediately interbank loan will be charged at 2% (banks may call FED bluff). But all funds lent to FED will earn an interest rate of 2%. would you as citi bank lend to bank of America at 1.5% or lend to FED at 2%? obviously, interbank liquidity will dry up which will push interbank loan rate so that the interbank loan interest rate will eventually around 2%. if interbank loan interest rate is 2%, eventually, commercial bank loan will reflect the cost of fund (interbank loan, in Singapore context, SIBOR) and increase the loan interest rate to general business activities.
please correct me if I am wrong.