After raising interest, who wins and who loses?

Last Wednesday, the Federal Reserve launched its fight to curb inflation and raise interest rates, hoping to calm the economy and raise the prices of basic items such as fuel, groceries, etc. Economically, raising the interest rate is one of the monetary policy instruments aimed at combating inflation in the economy. And reduce the financial liquidity circulating in the hands of individuals. From this point of view, the United States was not the only one to raise interest rates, as England, Germany, Italy and many Arab countries such as Saudi Arabia and Jordan followed suit. But the question that arises here is why the interest rate has been raised and how we are going to be affected by it, and who are the current winners and losers of this rise.

First, when we talk about raising interest rates, we need to know that the goals of central banks around the world are to improve jobs, maintain price stability and ensure moderate long-term interest rates. In this context, we note that since 2020, the spread of the Covid-19 crisis and the disruption of the supply chain, in addition to the freedom of traders to price unannounced, and most recently the Russo-Ukrainian war; Inflation began to increase in countries as a result of rising prices. As a result, inflation rates in the major countries have experienced a remarkable rise that they have not seen for decades. Inflation in Britain reached 9.2%, the highest level since 1988; In Japan, France, Italy and Germany it reached 9%, which is the highest rate since 1982. In May 2022, inflation in America reached 8.6%, which is the highest level since 1984. In this regard, the central banks have accepted increases. interest rates, the US Federal Reserve raised the rate. The interest rate is around 0.75% to fluctuate between 1.5% and 1.75%, which is the largest increase since 1994, in order to curb inflation and the exit of capital from the stock and digital currency markets versus bank deposits.

So it may vary in your mind that how will this increase affect individuals and will prices fall and will it have a positive or negative impact? Before answering this question, let me tell you that economic changes need a period of time to show their results on the economy, but in the beginning there is a lot of behavior that can result from raising interest rates. When the central bank raises interest rates, the goal is to increase the cost of borrowing across the economy, as higher interest rates make borrowing more expensive for both businesses and consumers to spend more payments on interest rates. which may cause individuals to postpone projects involving financing; At the same time, it encourages individuals to save to earn higher payments, which reduces the money in circulation, and this in turn will lead to a reduction in inflation and economic activity.

In terms of its impact on the stock market, bonds, credit cards, personal loans, student loans, car and business loans. In general, high interest rates tend to negatively impact stock prices, as the high cost of borrowing leads to a decline in corporate income and profits, in addition to investors’ desire to get rid of stocks and to become more defensive investments, thus lowering stock values ​​in the market. In terms of bond prices, it also tends to fall. Due to the emergence of other bonds with higher interest rates. Therefore, the main purpose of raising interest rates is to put pressure on the transfer of funds frozen in the financial markets to bank deposits.

It should be noted that the pressure to raise interest rates should be more on investment loans than on consumer loans such as consumer companies and factories, where despite the increase in the cost of loans, the latter are expected to receive tax exemptions or exemptions. of fees to encourage them to continue production, Raising interest rates on companies that produce basic commodities and require loans for expansion and growth will lead to higher costs and consequently higher prices, and therefore inflation levels can reach very dangerous levels .

Perhaps the biggest losers are people now trying to buy homes. The rise in inflation in recent times has led to a rise in mortgage rates, and this increase will lead to the expulsion of some potential home buyers from the market, and this is what America happened, where the demand for mortgages to buy homes in a month fell by more It is 15% lower than last year, according to the Mortgage Bankers Association. While the biggest beneficiaries of the increase in interest rates are the people who own savings accounts, the interest rate on savings accounts is expected to rise in the coming period.

Eventually, it will take some time for the impact of interest rates to start dampening inflation, and until then, inflation will remain subject to other developments such as the Ukraine war, supply chain chaos and, of course, COVID-19.

* Quoted from “Mad” newspaper.

All published articles represent only the opinion of its authors.

Leave a Comment