Higher mortgage costs led to a rise in mortgage defaults – exacerbated by a high number of sub-prime mortgages in the housing bubble. Increased interest rates 2004-06 had a significant impact on US housing market. The concern is that after several years of zero interest rates – people have got used to low rates. If people expect low-interest rates and they rise unexpectedly, it may cause people to find they can’t afford mortgages/loans. Banks may decide to reduce their profit margins and keep commercial rates unchanged.
It depends whether increases in the interest rate are passed on to consumers. This actually represents a cut in real interest rates from 3% (5-2) to 0.5% (6-5.5) Thus in this circumstance the rise in nominal interest rates actually represents expansionary monetary policy. Thus if interest rates rose from 5% to 6% but inflation increased from 2% to 5.5 %. The real interest rate is nominal interest rates minus inflation. It is worth bearing in mind that the real interest rate is most important. For example, if house prices continue to rise very quickly, people may feel that there is a real incentive to keep spending despite the increase in interest rates. At times, a rise in interest rates may have less impact on reducing the growth of consumer spending. It depends upon other variables in the economy. However, the higher interest rates may discourage starting a new project in the next year. For example, if you have an investment project 50% completed, you are likely to finish it off. The effect of rising interest rates can often take up to 18 months to have an effect. This makes monetary policy less effective as a macro economic tool. However, those with savings may actually be better off. For example, reducing inflation may require interest rates to rise to a level that causes real hardship to those with large mortgages. Those consumers with large mortgages (often first time buyers in the 20s and 30s) will be disproportionately affected by rising interest rates. The effect of higher interest rates does not affect each consumer equally. Higher interest rates affect people in different ways. Higher rates will reduce spending on imports, and the lower inflation will help improve the competitiveness of exports.ĪD/AS diagram showing impact of interest rates on ADĮffect of higher interest rates – using AD/AS diagram. If output falls, firms will produce fewer goods and therefore will demand fewer workers. Lower economic growth (even negative growth – recession). If we get lower AD, then it will tend to cause: This will lead to a fall in Aggregate Demand (AD). Therefore, higher interest rates will tend to reduce consumer spending and investment. A rise in interest rates discourages investment it makes firms and consumers less willing to take out risky investments and purchases. Interest rates affect consumer and business confidence. This could lead to higher taxes in the future. Higher interest rates increase the cost of government interest payments. The UK currently pays over £30bn a year on its national debt. Government debt interest payments increase. Therefore the economy is likely to experience falls in consumption and investment. Rising interest rates affect both consumers and firms. This has the effect of reducing aggregate demand in the economy. Higher interest rates increase the value of a currency (Due to hot money flows, investors are more likely to save in British banks if UK rates are higher than other countries) A stronger Pound makes UK exports less competitive – reducing exports and increasing imports. Higher interest rates make it more attractive to save in a deposit account because of the interest gained. Increased incentive to save rather than spend. This is a significant impact on personal discretionary income. 
5% increase in interest rates can increase the cost of a £100,000 mortgage by £60 per month. This will have a significant impact on consumer spending. Related to the first point is the fact that interest payments on variable mortgages will increase.
Increase in mortgage interest payments.Therefore other areas of consumption will fall. People who already have loans will have less disposable income because they spend more on interest payments. Therefore this discourages people from borrowing and spending.
With higher interest rates, interest payments on credit cards and loans are more expensive. Higher interest rates have various economic effects: Effect of higher interest rates Higher interest rates tend to reduce inflationary pressures and cause an appreciation in the exchange rate. Higher interest rates increase the cost of borrowing, reduce disposable income and therefore limit the growth in consumer spending. Higher interest rates tend to moderate economic growth. The Central Bank usually increase interest rates when inflation is predicted to rise above their inflation target.
0 kommentar(er)
