Interest rates are at the heart of all formal lending and borrowing transactions. They govern the cost of debt for people and businesses, how much money savers earn on their savings accounts and what they can make from investing in a variety of financial assets.
When interest rates rise, the cost of financing debt through credit cards and loans increases. This can discourage consumers from spending and slow economic growth. Lower rates can help businesses access more capital funding through debt, boosting economic activity.
Borrowers should be aware of how changes in interest rates affect their personal and business finances, so they can choose opportune moments to borrow. Borrowers also can shop around to find the best loan offers. In addition, they can avoid paying high interest rates by reducing their outstanding debt and keeping their credit scores above average.
Investments also can benefit or suffer from changes in interest rates, depending on the type of asset in question. For example, real estate prices are often closely linked to interest rates. High rates can lead to higher mortgage rates, which may depress demand and reduce the market’s value, while low rates can boost prices by making it cheaper to finance a home purchase.
Investors can look to the history of past interest rate movements to learn about future trends in a given economy. However, a return to the low-interest rates of yesteryear will likely not be possible, especially given current technology advancements, shifting demographics and global geopolitics.