How Rising Interest Rates Impact Global Economy? Read On To Know More, Here

Rate hikes by US Federal Reserve and other central banks may impact global economy

It is not only the Reserve Bank of India (RBI) which has hiked key rates twice in a month to squeeze liquidity out of the system to combat rising inflation, but even central banks across the globe are following suit.

Inflation has reached its highest levels in over 40 years in the US and Europe, which has forced central banks there to hike interest rates.

The US Federal Reserve announced the most aggressive interest rate increase in nearly 30 years, raising the benchmark borrowing rate by 0.75 percentage points on Wednesday.

Bank of England too is expected to raise key rates later today, which – if it does – would be for the fifth straight time.

Impact of higher interest rates on common man

Let us see what would be the impact of rising rates on the common public across the globe.

According to AFP, higher central bank interest rates affect the cost of borrowing for banks, which then pass those costs onto businesses, consumers and even governments. 

In other words, buying a house would become costlier as home loan rates will rise.

“Mortgage rates are already rising, that is likely to accelerate,” said Eric Dor, head of economic studies at France’s IESEG School of Management.

However, higher borrowing costs eventually slow borrowing and thus economic activity. This should eventually slow inflation, which is the objective of central banks in raising interest rates, AFP reported.

Those who have to borrow face higher costs, but those with fixed rates on long-term loans (as is the case for mortgage loans in many countries) stand to benefit as the value of the repayments has diminished in real terms.

Value of currencies

The dollar has been gaining in value against the euro as the US Federal Reserve has already begun raising interest rates, while the European Central Bank will only begin doing so in July.

The strong dollar will make imports cheaper for US consumers, but will likely hurt US exports which will be more expensive for foreign buyers. This could dampen employment.

However it is just the reverse for Britain and Eurozone, which have seen the value of their currencies weaken against the dollar. Imports are more expensive, especially oil priced in dollars. Exports are boosted as they are cheaper in dollars. A boom in exports could help support employment. 

Emerging Markets Issues

US interest rates also affect borrowing rates for many emerging market countries who borrow on international markets.

Lenders demand higher returns than those they can receive from safer investments in the United States. 

This can quickly crimp many emerging market governments, which are already facing stiff increases in energy and food import costs thanks to the pandemic and Ukraine war.

They can see the amount of lending available to them shrink as investors choose to park their money in US investments.

“For countries already in difficulty, like Turkey and Brazil and even more Argentina or Sri Lanka, this is very unwelcome as it raises the price of everything and causes a flow of capital towards the United States in particular” which makes financing their debt and economic activity more difficult and expensive, said Mr Dor.

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