Top 5 Effects of High-Interest Rates on the Economy

1. A rise in the value of the currency:

When the central bank raises the interest rates, it generally leads to an increase in the value of the country’s currency. Let us take the example of the UK. When the pound has a higher value, the competition in the UK becomes less competitive. This leads to a reduction in exports and aggregate demand in the economy.

2. The Impact on consumers and firms:

Because of factors like a less competitive market, reduced exports, and low disposable income due to higher interests, consumers and firms are drastically affected. Consumers have less money to spend, reducing the demand. It forces the firms to reduce the prices and ultimately leads to low profit and income.

3. Low Inflation:

The increased cost of borrowing, reduced investment, higher mortgage interest payments, and reduced consumption results in low inflation. So generally, the central bank increases the interest rate to control inflation. Increasing the interest rates is usually a strategic move to reduce inflation and control the prices of goods and services.

4. A rise in the interest payments of mortgages:

As mentioned earlier, higher interest rates result in high borrowing costs. Due to the increase in the interest rates, the variable mortgage payment also increases. It makes the purchases of houses expensive. It drastically affects the spending of the consumer. The financing for mortgage loans becomes costlier. This results in reduced demand for real estate investments.

Higher interest rates have a significant impact on a country’s economy. When the central bank of a country raises the interest rates, there are two significant outcomes in an economy. First, it slows down the economic growth of the country. Second, it helps in taming the inflation of the country. It shows that higher interest rates have their benefits and limitation. Planning the changes in interest rates is very crucial for balancing the economic growth and controlling inflation of an economy.