The U.S. Federal Reserve hiked up the interest rate by another 0.75 percentage point in June 2022, representing the highest ever increase since the year 1994, and the third hike this year, which is directly attributable to the highest ever inflation faced in 40 years.
Now, they do not raise the interest rates that consumers and banks pay on credit cards or loans; they only serve to control the federal funds rate, which is the cost of borrowing and lending between banks — but this leads to the impact on interest rates.
A press release by the Federal Reserve revealed the reasons for this high inflation to be the Russian war on Ukraine and the lockdowns in China due to COVID that worsened supply chain disruptions. The effect of the inflation has led to a mismatch of supply and demand, an increase in energy prices, and whole price pressures on the economy.
Experts predict that any further increases in interest rates will lead to recession and result in unemployment. Just the expectation that rates will climb has caused financial markets to see a 6 per cent drop. For businesses and consumers, hikes in interest rates signify that the cost of borrowing has increased.
In Canada, where the Bank of Canada increased the interest rate by 50 points to 1.5 per cent at the start of June, people will face constrained purchasing power and won’t be able to buy those goods they previously could. In Canada, Senior Economist at Scotiabank Marc Desormeaux says, “Higher prices mean that more of your income will go towards buying certain products. That leaves less money available for other discretionary items, which can impact consumer spending and, ultimately, economic growth.”
Not only does this impact businesses’ earning capabilities, but it will result in rising material and input costs, leaving them with less money to pay their employees higher wages. Until that remains the case, the employed workforce is dependent on the same salary figures as before to spend on higher-priced items.
In the U.K., the latest and fourth consecutive rate hike was one per cent. According to Mike Cherry, the National Chair of the Federation of Small Businesses (FSB), this means that, “The interest rises … will pile yet more stress on small-business owners struggling with debt.” This will impact especially those businesses that borrowed on floating rates.
An effect is also expected on the mortgage market, where fewer number of homeowners are expected to refinance their mortgages. However, given the strong demand for home buying and selling, the number of houses bought and sold is likely to remain the same, although the prices of homes will go up. Cars and some capital equipment are sensitive to rising interest rates, but they may survive due to newfound demand post-COVID. However, the overall impact on the economy will be a decrease in overall sales volume due to sluggish economic activity.
Arslan Ahmed | Staff Writer