Interest rates play a key role in your personal and business finances, and understanding how they work can help you make better financial decisions. Interest rates determine how much debt costs and can impact the amount you can earn from certain types of investments.
When interest rates rise, they usually encourage people to save more by making it less expensive for them to put their money into financial products like guaranteed investment certificates (GICs) and high-interest savings accounts. This reduces demand for goods and services, which can slow down inflationary pressures by reducing the amount of money in circulation.
The other key reason raising interest rates may make the economy more stable is that it makes borrowing more expensive. This can slow down consumer spending and corporate investment, which can also help to keep prices in check.
In addition to the cost of capital, there are other factors that influence interest rates, including the level of monetary stimulus and the state of the economy. The Financial Sector, which includes entities such as banks and credit unions, tends to benefit from higher interest rates because their profit margins expand when rates rise.
While rising interest rates are generally a positive for the economy, they can have negative consequences on individuals and businesses who owe large amounts of money, such as mortgage holders and credit card holders. In these cases, the effect of a rate hike can take up to 18 months to be felt.
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