The interest rates increase when inflation is estimated to be higher than the inflation target given by the central bank. Generally, interest rates are changed based on the economic activity of the country. For example, High-interest rates exist when the economy is overpowered, and rates reduce when the economy performs poorly. It shows that the performance of an economy and the increase in interest rates are related to each other. The effects of high-interest rates on consumers and businesses are real.
Today, let us discuss the top 5 impacts that higher interest rates have on the economy of the country:
High Borrowing Cost:
The payment of interest on credit cards and loans becomes expensive when the interest rates are raised by the central bank of the country. It Results in discouraging ordinary people and businesses to borrow and spend money. The disposable income of people is also getting negatively affected. Ultimately it affects the country’s economic growth.
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.
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.
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.
A rise in the interest payments of mortgages: