The Impact of Rising Interest Rates on the Global Economy

Interest rate increases are an important tool used by central banks to control inflation and stabilize the economy. The impact of this increase in interest rates is widespread, affecting various sectors of the global economy. One direct impact is an increase in borrowing costs. When interest rates rise, the cost of borrowing money for investment and consumption increases. Companies planning to expand may delay their projects due to additional costs. This can affect GDP growth, especially in countries that depend on direct investment. The housing sector also felt a significant impact. An increase in interest rates generally results in a decrease in demand for mortgages, as installments become higher. This causes a decrease in home prices, which can result in a decrease in consumer wealth. Reduced demand could have knock-on effects in the construction sector, affecting employment and consumption across the economy. In the context of inflation, the main purpose of increasing interest rates is to reduce inflationary pressures. With higher borrowing costs, consumer and corporate spending tends to decrease, which helps lower demand and, in turn, inflation. But if the increase in interest rates lasts too long or is too sharp, this could trigger a recession, where economic growth experiences contraction. From a global perspective, changes in interest rates in one country can affect international capital flows. For example, if interest rates in the United States increase, investors may withdraw investments from developing countries in pursuit of higher returns in the US market. This could worsen the financial conditions of developing countries, which depend on foreign capital for their economies. Changes in interest rates also impact currency exchange rates. An increase in interest rates tends to increase the value of a currency because it attracts foreign investors. This can affect the competitiveness of the country’s exports, as exported goods become more expensive for foreign buyers. This could lead to a larger trade deficit. On the other hand, the positioning sector in the stock market felt a negative impact. Rising interest rates often encourage investors to sell stocks and switch to safer bonds. This can result in a decline in the overall stock index, reducing the value of investments and affecting investor confidence. Additionally, individuals who have debt with variable interest rates are also affected. Rising interest rates can result in a spike in debt repayments, burdening household budgets and reducing consumption. Declining consumer spending is an important catalyst for economic slowdown, triggering a negative cycle. The increase in interest rates may serve as two sides of the coin. On the one hand, they can keep inflation under control and maintain long-term economic stability. On the other hand, if applied excessively, they can trigger economic stagnation or recession. Therefore, interest rate policy requires careful handling from central banks around the world.