People have asked me why interest rates matter. A modern economy is intrinsically linked to interest rates, thus their importance on the financial markets. Interest rates affect consumer spending. The higher the rate, the higher their loans will cost them, and the less they will be able to buy on credit. This is how it affects inflation, If consumer spending goes down, there will be less demand for products and services, thus prices won't rise as rapidly. Interest rates are used by central banks as a means to control inflation.
It also affects the housing market since it will cause people who have purchased properties on too highly leveraged loans to be unable to pay as interest rates rise. Thus they will look to selling their properties. This will cause more property supply on the market, and lower the property prices. This in turn will lead to others to want to cash out on their property investments which they have hoped to hold short- term and bought on interest-only loans. If this happens too quickly, it could cause a steep decline of the housing market. Since most people's wealth are tied to their properties, it will decrease people's net worth.
For an economy like the US which has a large trade deficit, higher interest rates will cause more foreign appetite for US government bonds and fixed deposits, thus resulting in capital inflows. This of course has a negative effect in the long-term as it will push the US dollar up, and widens the trade deficit further by making exports more expensive.
An entire library could be written on this topic. I'll save it for another time.
In a nutshell, if rate hikes continue, the economy will suffer, and may even trigger recession if consumer spending dips too much. Interest rates will affect ALL financial markets, including but not limited to, stocks, bonds, futures, forex, options etc.
As you see, interest rates play a HUGE part in the economy.
Grace Cheng is a seasoned traveler who loves collecting points and miles, and is constantly planning where to go next using her miles. She is co-founder and editor-in-chief at GET.com. Email: email@example.com.Editorial Disclosure: Any personal views and opinions expressed by the author in this article are the author's own and do not necessarily reflect the viewpoint of GET.com. The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the companies mentioned, and have not been reviewed, approved or otherwise endorsed by any of these entities.
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