How interest rate hikes affect your finances?

Most central banks around the world raised interest rates during the past months, which affected citizens' deposits and savings positively and sometimes negatively.

On Thursday, May 3, 2023, the Federal Reserve Board (the US Central Bank) announced that it would raise interest rates by 25 basis points to 5.25%, the highest level since 2007, and several banks in the Arab region and around the world followed suit.

The effect of raising interest on the cost of loans and deposits

The effect of raising interest rates is clear in every country, especially on the personal portfolio of its citizens, and on the cost of new borrowing, and therefore the financing needs of citizens are more expensive at the present time, especially loans with fixed interest, which carry higher risks for financiers from banks and financing companies, with higher interest rates.

Existing loans at variable interest rates also rise, whether real estate or car financing, and with them the cost to borrowers and the cost of monthly or quarterly repayment, which affects the budget of each borrower.

Mortgage loans and income decline

Variable-interest loans mean loans consisting of two parts, one of which is fixed, which is the interest margin, which is obtained by the financing bank and varies from one bank to another and according to each customer and his creditworthiness, in addition to a variable part, which is the official interest rate announced by the Central Bank, in the country that raised Interest, according to the Arab report.

Immediate impact

  The Independent on May 5, 2022 showed that there is an immediate impact on citizens as a result of the interest hike, which appears in their monthly mortgage and other personal loan installments, as well as in the decline in their ability to borrow to finance any deficit in household budgets. Especially since the increase in the possibility of a slowdown in economic growth, which is already fragile, increases the chances of stagnation, and thus high unemployment rates and a collapse in the value of income.

The silver lining of interest raising

Several Arab countries, including Egypt, raised interest rates on savings deposits by rates exceeding 22%, the National Bank of Egypt and Banque misr , the largest in the country, announced the issuance of savings certificates with an annual interest of about 25%, and a monthly interest of 22.5%, on January 4, 2023, coinciding with the increase approved by the Central Bank of Egypt in the exchange rates of the dollar against the Egyptian pound at the time.

Return of winnings

The intensity of the gains on the savings pools According to the “CNN” report, on June 26, 2022, the low prices for savers, whether the funds hidden in savings, certificates of deposit, and money market accounts, did not achieve gains during the Corona pandemic, before the interest rate hike in early 2022.

The good news is that these savings rates went up as the Federal Reserve raised interest rates, and savers started earning interest again. Even after several interest rate increases, savings rates remain very low, below inflation and expected returns in the stock market.