The Consequences of Rising Interest Rates


Following the meeting that occurred a week ago, there are rising interest rates in the United States, which will have an impact on citizens. The effect is not limited to the States, as Canada will also face issues that result from the interest rate hike. The specifics involve the Federal Reserve and their conclusion for a 2.00% to 2.25% fund rate.

An interest rate is the percentage of the borrowed amount that needs to be paid for, in addition to the initially loaned asset. They can be referred to as an annual percentage rate, which extrapolates on how they are usually calculated yearly. Money is constantly borrowed in our society; this is especially true for prominent purchases or investments.

In particular, interest rates will lead to the increase of many facets of our lives: savings, rates for credit cards, and the prime rate. There will be a growth to savings, due to the money market and credit-deposit rates becoming higher. Although this sounds positive, the flip side is that people with financial burdens will need to use a greater amount to offset it. In addition, credit card rates will increase, as the prime rate—the rate of credit given to people with high credit—will rise. This mainly will affect people that need to be loaned money short-term, as these rates will be significantly higher than long-term agreements. A higher national debt will also result from this, as there will be an increase in the amount needed for the United States’ government to borrow money.

Rising interests rates will also lead to a decrease in money spent by consumers and the amount generated by businesses. As mentioned previously, with credit card rates becoming higher, people will think twice before swiping away money for items they may not be able to afford immediately. This will then lead to an impact on businesses—they depend wholly on being able to produce a steady income in order to expand. Banks may see a different outcome, but the profit for other types of companies will be lowered. This also has a significant effect on the housing market, as the overall increasement in the amount needed to pay back long-term loans are higher. Most people are unable to afford to purchase a house without assistance from a bank, which leads to less real estate being sold.

The impact on Canada is a repercussion of the close ties we have with the United States. Throughout the past year, the exchange rate has been an area of concern for most citizens, and foreign goods expenses will only increase. Imported items will have a higher cost to purchase, therefore limiting the buying power of many Canadians. This topic will be the most detrimental for people with debt, however, as the integration between the two countries will possibly have an effect on Canadian interest rates.