Dear readers, in this post I'm breaking down an important financial topic you need to know about it and that is about the impact of interest rates. What is meant by Interest rates? Basically, an interest rate is the percentage that is charged by a investor to a borrower just because of the money.
If the interest rate is high, it discourages the borrower as it slow down the investment and economic spending , on the other hand if the interest rate is lower it encourages the borrower as the business investment becomes higher and the economical activity rise up. For example, if one borrows one million for investment and he has to pay the interest at the rate of 10%, he has to pay 100 thousand as an interest on the borrowed amount which is quite high and it discourages the borrower because he has to invest in such a business which could enable him to make a high benefit so that he could be able to save substantial amount for his business as well as save enough amount for payment of interest, similarly, if the same amount is borrowed at the interest rate of 4 or 5% it could enable the borrower to save amount for both purposes smoothly.
Then it comes about the investment, if the interest rates are low then it encourages the borrower because the investment in the projects and businesses are at the low cost and financing is reduced so it will be beneficial for the borrower. On the other hand, if the interest rates are higher then it will have the opposite effect, it will somehow discourage the borrower because he has to pay more for the investment.
Interest rates also affect the real estate (Housing market). If the interest rate is low then it will increase the demand for mortgages, then the home sales will be expanded more. In contrast, if the interest rate is high, then it will reduce the demand and the housing market will gonna be slowdown.
Furthermore, it comes the consumer spending, if the interest rate is high then the consumer will spend less and save in a big amount, on the other hand, if the interest rate is low then it will encourage the consumer because it will increase the income and the consumer will spend more rather than saving.
After that the next impact of interest rate is about the currency value. If the interest rate is high then the value of the currency will touch the sky which will be good for the economy of any country and if the interest rate is low then it will effect the currency, resulting the decrease in the value of currency and it will definitely make the currency weaker.
Basically, interest rates more affect the inflation that is why central banks uses interest rates to control the inflation among the country. Higher interest rates can help reduce the inflation, while low interest rates are used to refresh the economic activities and it cannot reduce the inflation among the country.
Finally, it comes about the savings, if the interest rates are high then it will benefit the saver like by returning the saver better amount. Conversely, low interest rates will gonna be somehow challenging for the savers because of it returns.
Overall, these were some of the impacts of the interest rates, central banks of any country is basically used to manage the inflation, economy of the country, growth and etc.
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