Decisions related to interest rates usually receive wide attention and anticipation by investors in various sectors and at various levels, individuals and institutions. Interest and follow-up to those decisions and the details of monetary policy have increased in recent periods for the general public, including non-specialists, in light of the broad economic pressures. facing the international economy, and the repercussions of these pressures on prices and living conditions, and with increasing awareness of the nature of monetary policies and their effects.
The “Interest rate” is most of the most vital indicators on this context, and anybody is eager to look forward to updates associated with it on the periodic meetings of vital banks round the world, particularly since it sends clean messages about the trends and potentialities of the economic system
Interest rates have been making headlines since the first months of 2022, and this matter is no longer limited to major investors and bankers alone, but has become an obsession for many individuals due to the high costs of their loans.
Since last year until today, with global inflation rising to record levels, approaching 8.7 percent in the United States and exceeding 10 percent in Europe and Britain, global central banks have followed a policy of raising interest rates to curb inflation.
All fears would arise if inflation continued to rise for six consecutive months or more, which is what has already happened, but has not led to a global economic recession yet.
So what is “interest”? How can interest rates affect the economy and people’s lives? When will the competent authorities resort to raising interest rates regarding monetary and financial policies? When should it be reduced or fixed? What is the relationship of inflation, recession, deflation, and other economic conditions to the interest rate?
What does interest mean…and what is its relationship to inflation?
The main goal of important banks is “fee stability,” and so as to gain this purpose and scale back inflation or face recession, they use various equipment at their disposal, most notably the “interest price.”
Interest is the return on money invested in banks, and the interest rate is adjusted (either by raising or lowering it) in view of inflation rates.
When inflation rates rise, interest rates are raised; To restrain it, while if inflation reaches the target rate (natural limits) the interest is reduced,
In this way, inflation is controlled, which is what central banks have resorted to since last year, when they followed a policy of monetary tightening and raising interest rates to confront high inflation rates.
Concerning the repercussions of decreasing hobby fees, she explained that a decrease hobby fee stimulates borrowing, which in turn leads to more spending, and then expanded interest in addition to corporate income and higher income.
Conversely, in the case of high interest rates, this leads to an increase in the cost of borrowing at the individual and corporate levels, and a reduction in spending and demand for goods in general, which means a decrease in corporate profits and the postponement of their expansion and development plans due to the high cost of borrowing (which may lead to recession).
Impact of interest rates
Regarding the impact of interest decisions, whether reducing or raising them, on individuals, financial markets expert, economic analyst Dr. Hossam Al-Ghayesh, explained in exclusive statements to the “Eqtisad Sky News Arabia” website, that the decision to raise interest rates may be negative for borrowers and those looking for financing for their projects, or positive. On the other hand for depositors.
He pointed out that deposit holders in banks benefit from raising interest rates, which increase the prices of deposits, which also increases customer gains, explaining that the interest of banks, whether related to deposits or investment certificates, is called the “risk-free return on investment,” and it is the lowest return obtained. It is completely risk-free. He also pointed out that it is important whether for depositors, savers or borrowers.
He added that each of the aforementioned categories has a different interest effect, as follows:
If the interest is high, it has a significant impact on people refraining from investing and seeking to benefit from the high interest rates in banks. However, if it is low, it encourages savers to increase the volume of investments.
Therefore, for individuals, interest decisions have a great impact on them, especially those with large financial deposits, as they may push them towards placing the financial liquidity available to them and directing it to invest in banks through various banking tools or products, whether investment certificates, deposits, etc.
As for the effect of interest on company and character investors, the financial markets professional defined that they’re significantly affected, as all of them are seeking for the highest diploma of profitability and income maximization. When bank costs are excessive, traders try as a lot as feasible to direct their monetary liquidity to those banks so that they attain earnings from the high hobby charges.
If the investor wants to borrow while the interest is high, he should avoid this step during the period of rise because of the risks it represents for him.
In order for investment and the free sector to be encouraged to borrow from banks, the interest rate must be low, or at least there must be a balance between the return on investment in the market and the interest available in the banks.
The economist added: The ordinary citizen is also affected by decisions to change interest rates, because raising interest results from the attempt of central banks to target inflation, so there is already existing inflation that has an impact on individuals, increasing the volume of their spending and consumption, so the presence of part of the liquidity in the banks can To compensate them for part of the cost they spend on consumption.
He pointed out that when central banks always have a large size of the family sector in the banks and their deposits and investments, they take into account that in the event of high inflation, they raise interest with the aim of compensating the consumer for part of the cost as a result of the rise in prices in the existing waves of inflation, while following tools for absorbing liquidity from the markets.
The financial markets expert explained that converting the hobby fee has no effect on prices, due to the fact the interest charge is a response to rising expenses and now not the alternative way round. He defined that rising charges are a trademark of a rise in inflation quotes, which prompts imperative banks to elevate hobby quotes so one can target the present inflation. .
Everyone follows in the footsteps of the US Federal Reserve
The first domino started with the Federal Reserve in the United States, which raised interest rates 11 consecutive times to reach their highest levels in 22 years, reaching a range of 5.25 percent and 5.5 percent.
Naturally, the majority of central banks in the world are forced to follow the Federal Reserve’s lead in this regard, especially those whose currencies are directly linked to the dollar, such as the Gulf countries, for example.
What is the direct impact on the productive sectors in general?
High interest rates mean a rise in the cost of bank loans at the individual and corporate levels, thus reducing spending and demand for goods, i.e. a decrease in corporate profits and the postponement of expansion plans.. And here recession fears appear.
The sectors most affected are often construction and real estate, as well as companies listed on the stock exchange, from which investors seeking to make easy money exit by buying bonds.
Most people do not give enough time, if they do at all, to think about how central banks affect them.” … Not only in their daily lives, but also in influencing the opportunities their children will have in the future.
In this episode of the “Capsules” program, we review how high interest rates have affected global economies as well as individuals.
How does raising interest rates suppress inflation?
Inflation is a global phenomenon that was exacerbated by the Russian war in Ukraine and the disruption of global supply chains after the “Covid-19” closures in China. To combat it, other central banks in the world are taking similar measures.
Raising interest rates may be the most prominent monetary tool used by all central banks to curb inflation, but it may not always work.
In theory, the rule says that the decision to raise the interest rate increases the burden of new and existing loans, which means that bank customers will think more than once before borrowing.
This is due to the fact that banks will increase the interest rate for those wishing to borrow, which means that they (bank customers) may make a decision to postpone borrowing until it decreases.
The postponement decision will result in several things, including:
- It may be a reason for refraining from purchasing a good or service, or expanding an existing project or opening a new one.
- It will slow down recruitment processes.
As a result, cash liquidity and consumption will be less, and the goal of the decision to raise the interest rate remains to absorb cash liquidity from the market to slow consumption, which is the first way to reduce inflation in any economy.
Raising the interest rate will also push the transfer of liquidity to banks in the form of deposits, in return for which their owners receive high interest from banks as an investment tool, and here the central bank succeeds in withdrawing liquidity from the markets.
How does interest rate affect the economy?
In short, when interest rates are raised, this leads to:
- An immediate decline in demand for borrowing.
- In return, increased demand for depositing funds.
- These matters may slow down economic growth rates.
- Decline in the pace of investment.
- A decline in the pace of spending of all kinds.
- Direct impact on the productive sectors and the labor market.
- Impact of financial markets.
- Impact of stock markets.
How does raising interest rates affect the average citizen?
For the average citizen – in simple terms – raising the interest rate would lead to:
- Increased borrowing costs from banks.
- Paying more money for vital services.
- Pay more for investment and car loans.
- Pay more on mortgages.
- Raising interest prompts depositors to deposit their money in banks as an investment tool to obtain high returns.
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